Learning Outcomes
After studying this article, you will be able to identify and apply the main capital gains tax (CGT) reliefs and exemptions relevant for the SQE1 exam. You will understand the conditions for Business Asset Disposal Relief, hold-over relief, rollover relief, and the annual exempt amount. You will also be able to explain how these reliefs interact and apply them to practical scenarios.
SQE1 Syllabus
For SQE1, you are required to understand the principal CGT reliefs and exemptions available to individuals and businesses. In your revision, focus on:
- the operation and conditions of Business Asset Disposal Relief (BADR)
- the requirements and effect of hold-over relief for gifts of business assets
- the application of rollover relief for reinvestment in qualifying business assets
- the annual exempt amount and its use in CGT calculations
- the interaction and order of application of these reliefs and exemptions
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What is the maximum lifetime gain that can qualify for Business Asset Disposal Relief, and what is the CGT rate applied?
- Which relief allows a capital gain to be deferred when a business asset is gifted, and what is the main condition for this relief?
- How does rollover relief operate when a business reinvests proceeds from a qualifying asset into a new asset?
- What is the annual exempt amount for individuals for CGT in the 2023/24 tax year, and can it be carried forward if unused?
Introduction
Capital gains tax (CGT) is charged on the profit made when certain assets are disposed of. However, several reliefs and exemptions can reduce or defer the CGT liability. For SQE1, you must be able to identify when these reliefs apply, calculate the effect on the taxable gain, and understand their interaction. This article covers the main reliefs and exemptions: Business Asset Disposal Relief, hold-over relief, rollover relief, and the annual exempt amount.
Business Asset Disposal Relief (BADR)
Business Asset Disposal Relief (BADR), formerly Entrepreneurs’ Relief, reduces the CGT rate to 10% on qualifying business disposals, up to a lifetime limit.
Key Term: Business Asset Disposal Relief (BADR)
A relief reducing CGT to 10% on qualifying business disposals, subject to a lifetime limit and strict conditions.
To qualify for BADR, the disposal must be of:
- all or part of a business (sole trader or partnership interest)
- shares in a “personal company” (where the individual holds at least 5% of ordinary share capital and voting rights, and is an employee or office holder)
- assets used in a business after cessation
The individual must have owned the business, shares, or assets for at least two years before disposal. The maximum lifetime gains eligible for BADR is £1 million.
Worked Example 1.1
Sarah has run a bakery as a sole trader for 10 years. She sells the business, making a gain of £600,000. She has never claimed BADR before. What CGT rate applies?
Answer: Sarah can claim BADR, so the £600,000 gain is taxed at 10%, not the standard rate.
Exam Warning
BADR is only available if all conditions are met at the date of disposal. For shares, check both the 5% holding and employment/office holder requirements for the full two years before disposal.
Hold-Over Relief
Hold-over relief allows a gain on the gift of certain business assets to be deferred until the recipient disposes of the asset.
Key Term: hold-over relief
A relief deferring CGT on the gift of qualifying business assets, so the recipient takes over the deferred gain.
Hold-over relief is available when:
- business assets (such as land, buildings, or unlisted shares) are gifted or sold at undervalue
- both donor and recipient jointly claim the relief
- the asset is used in a trade, or the shares are in a trading company
The deferred gain is deducted from the recipient’s base cost, so CGT is paid when the recipient disposes of the asset.
Worked Example 1.2
Tom gifts shares in his family trading company to his daughter. The shares have a gain of £100,000. They claim hold-over relief. What is the effect?
Answer: Tom pays no CGT now. The £100,000 gain is deducted from his daughter’s base cost. She will pay CGT on this gain when she sells the shares.
Rollover Relief
Rollover relief allows a business to defer a gain when proceeds from a qualifying asset are reinvested in a new qualifying asset.
Key Term: rollover relief
A relief deferring CGT when a gain from a qualifying business asset is reinvested in a new qualifying asset within a set period.
The main conditions are:
- the old asset and new asset must be used in the trade (e.g. land, buildings, fixed plant, or machinery)
- the new asset must be acquired within one year before or three years after the disposal of the old asset
- the gain is deducted from the base cost of the new asset
If only part of the proceeds is reinvested, only part of the gain is deferred.
Worked Example 1.3
A partnership sells a delivery van for a gain of £20,000 and buys a new van for the same trade within two years. What is the effect if they claim rollover relief?
Answer: The £20,000 gain is deducted from the base cost of the new van. CGT is paid when the new van is sold.
The Annual Exempt Amount
Each individual has an annual exempt amount for CGT. Gains up to this amount are tax-free.
Key Term: annual exempt amount
The annual CGT allowance for individuals. Gains up to this amount are exempt from CGT in the tax year.
For 2023/24, the annual exempt amount is £6,000 per individual. It cannot be carried forward if unused. The exemption applies before any reliefs.
Worked Example 1.4
Helen sells shares and makes a gain of £5,000 in 2023/24. What is her CGT liability?
Answer: The gain is below the annual exempt amount, so no CGT is due.
Interaction and Order of Application
When more than one relief or exemption applies, the annual exempt amount is deducted first, then reliefs (such as BADR, hold-over, or rollover relief) are applied to the remaining gain.
Worked Example 1.5
Mark sells qualifying business assets for a gain of £1,020,000. He has not used his annual exempt amount. What is his CGT position?
Answer: Deduct the annual exempt amount (£6,000), leaving £1,014,000. The first £1,000,000 is taxed at 10% under BADR. The remaining £14,000 is taxed at the standard CGT rate.
Key Point Checklist
This article has covered the following key knowledge points:
- Business Asset Disposal Relief reduces CGT to 10% on qualifying business disposals, up to a £1 million lifetime limit.
- Hold-over relief defers CGT on gifts of business assets, with the gain passed to the recipient.
- Rollover relief defers CGT when proceeds from a qualifying asset are reinvested in a new qualifying asset.
- The annual exempt amount allows individuals to realise gains up to £6,000 tax-free (2023/24).
- The annual exempt amount is applied before other reliefs.
- Reliefs and exemptions can interact, but each has strict qualifying conditions.
Key Terms and Concepts
- Business Asset Disposal Relief (BADR)
- hold-over relief
- rollover relief
- annual exempt amount
