By Umesh Modi
A capital gain arises when certain capital assets are sold at a profit. The gain is the net sale proceeds less the net purchase price.
What are the main features of the current system?
- Capital gains tax (CGT) is charged at the rates of 10 per cent, 18 per cent, 20 per cent or 28 per cent on gains above the annual capital gains exemption limit.
- Entrepreneurs’ Relief (ER) may be available on certain business disposals.
Entrepreneurs’ Relief (ER)
ER may be available for certain business disposals and has the effect of charging the fi rst £10 million of gains qualifying for the relief at an effective rate of 10 per cent.
The relief will be available to individuals on the disposal of:
- the whole, or part, of a trading business that is carried on by the individual, either alone or in partnership
- shares in an individual’s ‘personal company’
- assets used by a business or a company which has ceased within the last three years. Where an individual makes a qualifying business disposal, relief may also be available on an ‘associated disposal’. An ‘associated disposal’ is a disposal of an asset:
- used in a qualifying company or group of companies of the individual; or
- used in a partnership, where the individual is a partner.
Restrictions on obtaining the relief on an ‘associated disposal’ are likely to apply in certain specific situations. This includes the common situation where a property is in personal ownership but is used in an unquoted company or partnership trade in return for a rent. Under ER the availability of relief is restricted where rent is paid.
Ownership period of two years
For business disposals on or after 6 April 2019, the necessary qualifying period of ownership is two years. The five per cent rule for company shareholders To qualify for ER, the company needs to be an individual’s ‘personal company’ where the individual must:
- be a company employee or officeholder
- hold at least five per cent of the company’s ordinary share capital; and
- be able to exercise at least five per cent of the voting rights. For disposals on or after 29 October 2018, they must also satisfy one of the following tests:
- a distribution test – an individual is entitled to at least five per cent of the company’s profi ts available for distribution to equity holders and five per cent of the assets available for distribution to equity holders in a winding up; or
- a proceeds test – an individual is entitled to at least five per cent of the proceeds in the event of a disposal of the whole of the ordinary share capital of the company.
From 6 April 2019 those shareholders whose holding in their company is reduced below the normal fi ve per cent qualifying level as a result of raising funds for commercial purposes by means of an issue of new shares may still obtain ER.
An election can be made which allows shareholders to crystallise a gain on their shares before the dilution occurs. This would be achieved by treating the shareholding as having been sold and immediately re-purchased at the prevailing market value.
The election will have to be made in their tax return for the year in which the dilution takes place. The shareholder may also elect to defer the accrued gain until their shares are disposed of.
CGT annual exemption
Every individual can make gains up to the annual exemption without paying any CGT. The annual exemption for the tax year 2019/20 is £12,000 (£11,700 in 2018/19).
Consideration should be given to ensuring both spouses/ civil partners and children in the family business utilise this facility.
Exceptions to the CGT rates
The rates of CGT are generally 10 per cent and 20 per cent. However, 18 per cent and 28 per cent rates apply for gains on buy-to-let property.
Other reliefs which you may be entitled to
And finally, many existing reliefs continue to be available, such as:
- private residence relief;
- business asset rollover relief, which enables the gain on a business asset to be deferred until a point in the future;
- business asset gift relief, which allows the gain on business assets that are given away to be held over until the assets are disposed of by the donee; and
- any unused allowable losses from previous years, which can be brought forward in order to reduce any gains.
Source: Practice Track
This article is based on current legislation and practice and is for guidance only. Specific professional advice should be taken before acting on matters mentioned here. Umesh Modi BA ACA is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene LLP. He can be contacted on 020 7383 3200 or umesh. [email protected]
This article also appears in the December/January issue of Pharmacy Business.