Capital Gains Tax (Advanced)

Basic CGT computation:

CGT rates 2024/25:

• Basic rate (gains falling within remaining BRB after income): 10% (general), 18% (residential property)
• Higher rate (above BRB): 20% (general), 24% (residential property — was 28%, reduced April 2024)
• BADR rate: 10% flat
• Investors' Relief rate: 10% flat

Annual Exempt Amount (AEA): £3,000 (2024/25) — reduced from £6,000 in 2023/24. Deducted from total gains before applying rates. Use strategically: apply first to gains taxed at the HIGHEST rate.

2024/25 changes summary:

• AEA reduced to £3,000 (from £6,000 in 2023/24; £12,300 pre-2023/24)
• Residential property higher rate reduced to 24% (from 28%) — April 2024
• FHL regime abolition announced from April 2025 — will affect CGT reliefs for holiday lets

Proceeds deemed at market value:

• Gifts (except to spouse/civil partner or charity)
• Transfers between connected persons (at arm's length market value, even if consideration less)
• Any bargain not at arm's length
• Transfers into or out of trusts (some cases)

Part disposals:

When part of an asset is disposed of, only PART of the cost is allocable to the disposal. Apportion the original cost using the A/(A+B) formula:

Where:

• A = gross proceeds of the part disposed
• B = market value of the part retained at date of disposal

Worked example: Land cost £100,000. Part sold for £80,000. Part retained valued at £120,000.

• Cost of part disposed: £100,000 × £80,000 / (£80,000 + £120,000) = £100,000 × 0.4 = £40,000
• Gain: £80,000 − £40,000 = £40,000
• Remaining base cost of land retained: £100,000 − £40,000 = £60,000

Chattels (tangible, moveable property):

Examples: paintings, antiques, jewellery, furniture. Special rules depending on value and "wasting" nature.

Non-wasting chattels (useful life > 50 years, or indefinite — most antiques, paintings, etc.):

• Small chattels exemption: If proceeds AND cost both ≤ £6,000, the gain is EXEMPT
• Marginal relief: If proceeds > £6,000 but cost ≤ £6,000: gain CAPPED at (proceeds − £6,000) × 5/3
• Loss limit: If proceeds < £6,000 but actual cost > £6,000: for loss calculation, proceeds are DEEMED to be £6,000 — limits the allowable loss
• If both proceeds and cost > £6,000: normal rules

Worked example: Antique cost £5,000, sold for £9,000.

• Normal gain: £9,000 − £5,000 = £4,000
• Marginal relief cap: (£9,000 − £6,000) × 5/3 = £5,000. Not limiting here (normal gain £4,000 < £5,000).
• Chargeable gain: £4,000

Worked example 2 (marginal relief binding): Antique cost £3,000, sold for £8,000.

• Normal gain: £8,000 − £3,000 = £5,000
• Marginal relief cap: (£8,000 − £6,000) × 5/3 = £3,333.33
• Chargeable gain: £3,333 (lower)

Wasting chattels (life ≤ 50 years):

• Generally EXEMPT from CGT. Examples: yachts, caravans, racehorses (private use), wine (generally)
• Exception: wasting chattels USED IN A BUSINESS that have qualified for capital allowances are NOT exempt — normal CGT rules apply. Loss restricted to difference between cost and proceeds (not more).

Wasting assets (non-chattel):

• Life ≤ 50 years (e.g., short lease, patent, copyright)
• Cost is DEEMED to decline in a straight line over the expected life
• Applied via "wasting asset formula": allowable cost = original cost × remaining life / original life
• Different tables apply to leases specifically (from Schedule 8 TCGA 1992)

Worked example (wasting asset): Patent cost £20,000 when it had 10 years left; sold after 4 years (6 years remaining) for £15,000.

• Allowable cost: £20,000 × 6/10 = £12,000
• Gain: £15,000 − £12,000 = £3,000

Connected persons include:

• Spouse/civil partner (but see "spouses" below — different rule)
• Direct and remote relatives: siblings, ancestors, descendants (parent, child, grandchild, etc.), AND their spouses and siblings' spouses
• Business partners (and their spouses and relatives)
• Trustees of settlements of which the taxpayer is a settlor/beneficiary
• Companies under common control

Connected persons rules:

1. Disposals are deemed to be at MARKET VALUE regardless of actual consideration — preventing artificial undervaluations
2. Losses arising from disposals to connected persons are RESTRICTED: only usable against gains on transactions with that SAME connected person (not against other gains)

Spouses and civil partners — special rule:

• Transfers between spouses/civil partners who are LIVING TOGETHER are deemed at "no gain, no loss"
• The transferring spouse's original base cost (+ adjustments) is passed to the receiving spouse
• On subsequent disposal by the receiving spouse, the gain/loss is calculated using that inherited base cost
• Planning opportunity: shift assets between spouses to use both AEAs (£3,000 × 2 = £6,000), both BRB, both BADR £1m lifetime limits, etc.
• Does NOT apply to separated/divorced spouses (complex rules on date of separation)

Negligible value claims (s.24 TCGA):

• If an asset has become "of negligible value" (essentially worthless — e.g., shares in a failed company), the taxpayer can make a claim treating the asset as SOLD AND IMMEDIATELY REACQUIRED at the current value
• Creates an immediate capital LOSS for offset
• No actual disposal needed — useful for worthless shares held in a failed company
• Can specify a date up to 2 years before the end of the tax year of claim for the deemed disposal
• Loss available against gains (subject to usual rules)
• Share loss relief against INCOME: for shares in an unlisted trading company that has become of negligible value, the loss can (by election) be set against INCOME of that tax year or the previous year — valuable income tax relief (up to 45%)

Business Asset Disposal Relief (BADR) — formerly Entrepreneurs' Relief:

• 10% CGT rate on qualifying gains (instead of standard 10% or 20%)
• Lifetime limit: £1 million (reduced from £10m in March 2020)
• Claim required (by anniversary of 31 January after end of tax year of disposal)

Qualifying disposals:

• Disposal of the whole or part of a trading business (sole trader or partnership share)
• Disposal of assets after cessation — within 3 years of cessation of a previously-qualifying business
• Disposal of shares in a "personal company" that is a trading company or holding company of a trading group
• Associated disposals: personally-owned assets used in the business, disposed of alongside the qualifying business disposal

Qualifying conditions for "personal company" share disposals:

• At least 5% of ORDINARY SHARE CAPITAL, AND
• At least 5% of VOTING RIGHTS, AND
• Either 5% of PROFITS AVAILABLE FOR DISTRIBUTION and ASSETS ON A WINDING UP (entitlement test), OR 5% economic interest on a disposal of the company (proceeds-based alternative test)
• TRADING COMPANY or holding company of trading group
• Must be an OFFICER OR EMPLOYEE of the company (unpaid role OK)
• Conditions met throughout a 2-year period ending with the disposal

Associated disposals:

• Personally-owned assets used in the business (e.g., landlord owns property used by own partnership/personal company)
• Must be disposed of alongside the material disposal of the business/shares
• BADR available only on the proportion of the asset used in the business (and during qualifying period) — relief not available if the owner received a rent (partial restriction)

Worked example: Owen sells his 40% shareholding in AlphaCo (trading company) for £800,000 in 2024/25. He's owned the shares since 2010 and is a director. Base cost £100,000. Already used £200,000 of BADR lifetime allowance.

• Gain: £800,000 − £100,000 = £700,000
• BADR remaining: £1,000,000 − £200,000 = £800,000 available
• Full £700,000 qualifies for BADR at 10%: tax = £70,000
• Without BADR (at 20% higher rate): tax would be £140,000 — saving £70,000

Investors' Relief (IR):

• 10% CGT rate on gains from disposal of QUALIFYING SHARES
• Separate lifetime limit: £10 million (IN ADDITION to BADR £1m)
• Introduced in Finance Act 2016 to encourage external investment in unlisted trading companies

Conditions for Investors' Relief:

• Ordinary shares in an UNLISTED TRADING company (or holding company of trading group)
• Shares SUBSCRIBED FOR (not purchased second-hand) and issued on or after 17 March 2016
• Shares held continuously for at least 3 years from 6 April 2016 or from issue (whichever later)
• Investor must NOT be an officer or employee (or a connected person of one) during the holding period (rules out owner-directors — different from BADR)
• Used in ISA/SIPP, EIS, SEIS etc. doesn't qualify

IR is aimed at PASSIVE EXTERNAL INVESTORS. BADR is aimed at OWNER-MANAGERS. They target different scenarios.

Rollover Relief (Replacement of Business Assets — s.152 TCGA):

When a business disposes of a business asset and reinvests the proceeds in a REPLACEMENT business asset, the gain is DEFERRED (rolled over) into the replacement asset's base cost.

Conditions:

• Both old and new assets must be "QUALIFYING BUSINESS ASSETS" (land and buildings, fixed plant and machinery, ships and aircraft, certain goodwill)
• The replacement must be acquired between 1 YEAR BEFORE and 3 YEARS AFTER disposal
• Both assets used in the same trade (or in a trade controlled by the same person)
• Full reinvestment of proceeds for full relief

Mechanism:

• Gain on sale = Proceeds − Cost − Costs
• Rolled over amount = Gain × (proceeds reinvested / total proceeds). Limited to the gain.
• Immediate gain = Gain − Rolled-over amount
• Rolled-over amount reduces the base cost of the new asset

Worked example: Business sells factory for £500,000 (cost £200,000). Buys new factory for £400,000 (reinvesting £400,000 of the £500,000 proceeds).

• Gain: £500,000 − £200,000 = £300,000
• Proceeds not reinvested: £500,000 − £400,000 = £100,000 (this is CRYSTALLISED as an immediate gain)
• Rollover: £300,000 − £100,000 = £200,000 deferred
• Immediate gain: £100,000
• New factory base cost: £400,000 − £200,000 = £200,000 (will give higher gain when eventually sold)

Partial rollover relief: If reinvestment is less than proceeds, the gain is split: part rolled over, part immediate. As above.

Holdover/Gift Relief (s.165 TCGA):

• For GIFTS of business assets, or sales at UNDERVALUE
• The gain is held over — not taxed on donor, but TRANSFERRED to the recipient (who inherits a reduced base cost)
• Requires joint election between donor and donee
• Effectively, the recipient pays the tax when they eventually sell

Qualifying assets for gift relief:

• Assets used in a trade
• Shares in an UNLISTED trading company
• Shares in a LISTED trading company IF held by an individual who holds at least 5% of voting rights (personal company)
• Agricultural property qualifying for APR

Worked example: Parent gives business to child. Asset market value £500k; parent's base cost £100k. Gain £400k.

• With gift relief election: parent has no chargeable gain. Child's base cost = £500,000 − £400,000 = £100,000 (same as parent's original cost).
• When child sells: if they sell for £600,000, gain = £500,000 (£600k − £100k).
• Without gift relief: parent would have £400k gain. Child's base cost = £500,000. When child sells for £600k, child's gain = £100k.
• Trade-off: total gains are the same (£500k across both) but timing differs. Plus consider each party's rate and AEA.

Incorporation Relief (s.162 TCGA):

• When a sole trader or partnership TRANSFERS a business (as a going concern) to a company in exchange for shares, the gain on transferred assets is DEFERRED into the shares received
• AUTOMATIC relief (no claim needed) if conditions met, but can elect out
• Conditions: transfer of business as a going concern with ALL ASSETS (except cash) in return for shares
• If consideration is partly in shares and partly cash: gain is apportioned (share of consideration in shares gets relief; cash part is immediately chargeable)

Mechanism: The gain on transferred assets reduces the base cost of the shares received (not the assets transferred to the company).

EIS Reinvestment Relief (Deferral Relief):

• Gain on ANY asset can be DEFERRED by investing in qualifying EIS shares (within 1 year before or 3 years after disposal)
• Gain "crystallises" when the EIS shares are disposed of (or conditions breached)
• No minimum holding period for deferral (unlike EIS income tax relief which requires 3 years)
• No lifetime limit on deferral (unlike SEIS which is capped)

SEIS Reinvestment Relief: 50% of the gain can be EXEMPTED (not just deferred) by investing in qualifying SEIS shares. Lifetime limit £200,000 per tax year (2024/25).

PPR relief exempts the gain on disposal of an individual's main residence (or part of it) from CGT.

Basic rules:

• Fully exempt if the dwelling has been the ONLY OR MAIN RESIDENCE throughout the period of ownership
• If only part of the period → PARTIAL relief based on periods of occupation / total period of ownership
• Only ONE main residence per spouse/couple (election can be made for which one if multiple residences)
• Garden and grounds up to 0.5 HECTARE included; larger if required for the use and enjoyment of the property

Formula for partial PPR relief:

Deemed occupation (counted as if occupied):

Important: The 3-year / 4-year / no-limit rules can combine — an individual working abroad for 10 years then 2 years UK work elsewhere can potentially all be deemed occupation (subject to re-occupation condition). Quality of qualifying periods must be examined.

Worked example — partial PPR:

Zoe bought her house in January 2010 for £200,000. She lived in it until December 2013 (4 years). From January 2014 to December 2018 (5 years), she worked in Dubai (overseas employment). From January 2019 to December 2021 (3 years), she worked in Edinburgh (UK employment). She returned to live in the house in January 2022 and sold it on 31 December 2024 for £500,000.

Ownership period: 15 years (Jan 2010 − Dec 2024).

Occupation analysis:

• Jan 2010 − Dec 2013: 4 years actual occupation (48 months)
• Jan 2014 − Dec 2018: 5 years overseas employment — ALL deemed occupation (she returned afterwards)
• Jan 2019 − Dec 2021: 3 years UK elsewhere employment — deemed occupation (within 4-year limit, she returned)
• Jan 2022 − Dec 2024: 3 years actual occupation
• Last 9 months already within actual occupation period — doesn't add separately

Total qualifying occupation: 15 years (all of it).

Gain: £500,000 − £200,000 = £300,000. FULLY exempt under PPR — £0 chargeable.

Worked example 2 — partial PPR with non-qualifying period:

Olivia bought a house in July 2015 for £250,000. She lived in it until June 2019 (4 years). She then rented it out from July 2019 to August 2024 (5 years 2 months = 62 months) — NEVER reoccupied. She sold it in September 2024 for £400,000.

• Ownership: July 2015 − September 2024 = 9 years 3 months = 111 months
• Actual occupation: 4 years = 48 months
• Last 9 months: Jan 2024 − Sept 2024 — deemed occupation (she had lived there previously). Already in the 62-month rental period? Yes. So ADD 9 months deemed.
• Wait — the 3-year absence rule requires re-occupation afterwards. She didn't return. So the rental period (apart from the final 9 months) does NOT qualify.
• Qualifying period: 48 months actual + 9 months final period = 57 months
• Non-qualifying period: 111 − 57 = 54 months
• Gain: £400,000 − £250,000 = £150,000
• PPR relief: £150,000 × 57/111 = £77,027
• Chargeable gain: £150,000 − £77,027 = £72,973

Letting relief (restricted since April 2020):

• Previously: up to £40,000 relief for gains attributable to letting of main residence
• From April 2020: only applies if the owner SHARED occupation of the residence with the tenant during the letting period
• In practice, letting relief is now RARELY available — most commercial lets don't meet the shared-occupation test

Job-related accommodation exception: If the owner cannot live in their home because they must live in accommodation provided by their employer (e.g., armed forces, publicans, ministers of religion), the owned home can still be treated as main residence during that time (subject to conditions).

Multiple residences:

• An individual with more than one residence can ELECT which to treat as main residence (flip election within 2 years of acquiring the second)
• Useful for maximising PPR — e.g., flip between a long-held UK home and a recently-acquired second home to generate final-period exemption for both

Garden/grounds above 0.5 hectares: Additional relief only if the extra area is required for the reasonable enjoyment of the house (not based on owner's actual use, but on what a reasonable person would require).

When shares in the SAME company are acquired at different times and prices, which shares are disposed of when some are sold? The MATCHING RULES:

Share matching rules (order of priority):

1. Shares acquired on the SAME DAY as disposal
2. Shares acquired within the NEXT 30 DAYS after disposal (bed-and-breakfasting prevention — stops selling and repurchasing to realise tax losses/gains)
3. Share pool (s.104 pool) — all other shares of the same class, held at pool cost (weighted average)

Share pool (s.104 pool):

• Contains all shares of the same class of the same company held before the disposal (except those matched in rules 1 and 2)
• Records: total number of shares and total allowable cost (known as "pool cost" or "indexed pool cost" pre-April 2008 for individuals, now just pool cost)
• When shares are sold from the pool, the cost attributable = pool cost × shares sold / total shares in pool
• Bonus issues: ADD to pool without change in cost (more shares for same cost → reduces average cost)
• Rights issues: ADD to pool AT THE RIGHTS PRICE PAID

Worked example — share pool:

Maria bought Q plc shares: 2010 — 1,000 for £3,000; 2015 — 2,000 for £8,000; 2018 — 500 bonus shares (1 for 7). She sells 2,000 shares in 2024/25 for £11,000.

• Pool before disposal: 1,000 + 2,000 + 500 = 3,500 shares; cost £11,000 (bonus shares added with no extra cost)
• Cost of shares sold: £11,000 × 2,000/3,500 = £6,286
• Gain: £11,000 − £6,286 = £4,714
• Pool remaining: 1,500 shares; cost £11,000 − £6,286 = £4,714

Share reorganisations:

Bonus issues (capitalisation issues):

• Free shares issued out of reserves — no cash
• NOT a disposal — no CGT event
• Add bonus shares to the share pool without additional cost
• Effect: lower per-share cost in pool (same cost, more shares)

Rights issues:

• New shares offered to existing shareholders at a price, usually below market
• Shareholder's ACQUISITION — add rights shares to pool at the rights price paid
• NOT a disposal of existing shares
• Effect: increase in pool cost AND pool size

Sale of rights "nil-paid": If shareholder sells their rights rather than taking them up:

• Usually treated as a part disposal: sale proceeds counted against pool using A/(A+B) if the rights proceeds are > 5% of market value of holding
• If less than 5% of market value: small proceeds exemption — reduce pool cost by rights proceeds (no immediate gain)

Takeovers (share-for-share exchanges):

• Where Company A takes over Company B by issuing new A shares to B shareholders in exchange
• Section 135 TCGA: if conditions met, the "paper-for-paper" exchange is treated as NOT a disposal. The new shares take the old shares' base cost.
• Conditions: takeover is bona fide commercial, not for tax avoidance; Company A must hold >25% of Company B after the transaction (or results from a general offer)

Takeovers with mixed consideration (shares + cash):

• The CASH element is treated as a disposal (immediately taxable — proportional to total consideration)
• The SHARE element rolls over (no immediate CGT; new shares inherit proportional base cost)
• Base cost of old pool apportioned between cash and shares in proportion to their market values at takeover

Worked example: Takeover offers 2 new A shares + £5 cash for every 3 B shares. Market value at takeover: A shares £10 each; B shares £9. For a holding of 300 B shares with base cost £2,000:

• Receives: 200 A shares (2/3 × 300) + £500 cash (£5/3 × 300)
• Total value received: 200 × £10 + £500 = £2,500. Split: £2,000 shares, £500 cash — so 80% shares, 20% cash
• Base cost apportionment: £2,000 × 80% = £1,600 to shares; £2,000 × 20% = £400 to cash element
• Cash element = disposal of "part": Gain = £500 − £400 = £100 (immediate)
• New A share pool: 200 shares at cost £1,600 (when eventually disposed of, starts from this cost)

Share loss relief against income (s.131 ITA 2007):

• For SUBSCRIBED (not purchased) shares in an UNLISTED trading company that become of negligible value or are disposed of at a loss
• Taxpayer can elect to set the loss against INCOME of the current or previous tax year
• Valuable — provides income tax relief (up to 45%) on losses that would otherwise only get CGT relief (20%)
• EIS shares automatically qualify