Wealth in the form of money or property utilised to produce additional wealth is referred to as capital. A rise in the worth of that wealth is referred to as a gain. When you sell or give away an asset, you must pay capital gains tax (CGT). Making disposal is the term for this. CGT applies to various assets, including real estate (though not generally your primary residence, stocks and shares, and other artworks).
Capital Gains Tax
If you sell, give away, swap, or otherwise dispose of an asset and make a profit or ‘gain,’ you must pay capital gains tax (CGT). It is the gain you earn on the asset that is taxed, not the amount of money you get for it. To calculate the gain, you compare the selling profits (or the asset’s worth at the time it was disposed of) to the asset’s initial cost (or value when it was acquired).
As stated earlier, an asset might be sold or given away for less than its market worth, but the market value takes the place of any actual consideration paid. You must pay CGT on your net gain in order to deduct your costs from your gains. The components listed below help in reducing the amount of charged gain:
- Ancillary cost of acquisition (e.g. legal fees)
- Expenditure to increase the asset’s value (e.g. building an extension)
- Ancillary costs of disposal (e.g. agents fees)
- Allowances and tax relief
CGT Application
- When you sell, give away, trade, or otherwise dispose of an asset, you must pay capital gains tax (CGT), though some gains are explicitly excluded from CGT.
- If you live in the UK, you may be subject to CGT on the disposal of assets situated anywhere globally, not only in the UK.
- Non-residents who carry on a business in the UK are subject to CGT. You may be subject to CGT on UK land and property disposal if you are a non-resident (including during the overseas portion of a split-year) (private residence relief may apply).
- Individuals who are typically resident in the UK but temporarily live outside the UK are subject to specific CGT regulations (non-resident in the UK for less than five years).
- CGT is applicable when you give someone an asset as a gift. There are various requirements based on who you donate the gift to and special reliefs for commercial assets.
- CGT may also apply if you transfer assets as a result of a civil partnership dissolution, divorce, or separation.
You may be viewed as though you have disposed of an asset in specific circumstances. This may happen, for example, if a personal item, such as an antique, was damaged and you were compensated with a capital sum, such as an insurance payout.
Individuals are subject to CGT when they sell assets; businesses, on the other hand, are subject to Corporation Tax on any gains. The CGT rate is determined by the type of asset sold and the amount of personal income earned in the year the asset was sold. The rates are 18% or 28%, respectively. The basic capital gains tax rate was cut to 10% in April 2016, while the higher rate was dropped to 20%. The increased tariffs, however, do not apply to residential property sales.
Non-UK residents will be subject to capital gains tax on gains accrued on the sale of UK residential property after April 2015. On gains above the yearly exempt level, non-resident individuals will be taxed at the same rates as UK taxpayers (28 per cent or 18 per cent).
Capital gains that are exempt
The sale of your primary or only residence but may be partially taxable in specific instances, such as if you have rented or utilised part of the property for commercial purposes.
- Transfers of property between spouses or civil partners. These transfers are classified as no-gain/no-loss transactions.
- The majority of items whose value depreciates over time.
- Non-wasting and commercial possessions with a disposal value of less than £6,000.
- Private and vintage automobiles
- Donations to charity and membership in certain sports clubs.
- Some financial instruments like SAYE contracts, savings certificates, and premium bonds
- Life insurance policies entitle to the original owner or beneficiaries.
- Prizes and wins from sports betting, as well as the lottery.
- Compensation for personal or professional injury or damages.
- Some compensation payments for pensions that were mis-sold.
- Foreign currency held for your own use.
Capital Gains Tax Reliefs
The government have introduced several CGT reliefs that you may be able to take advantage over time. Here are a few examples:
- Investors’ Relief
- Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief
- Principal Private Residence
- Rollover Relief
- Holdover Relief for gifts
However, we will discuss Investors’ Relief here.
Investors’ Relief
Investors’ Relief is a capital gains tax (CGT) relief on the disposal of qualified shares in an unlisted firm. Investors’ Relief (IR) is a kind of extension of entrepreneurs’ Relief that allows investors to benefit from the same tax reduction under slightly different qualifying criteria. Despite being a separate relief, the rules for investors’ Relief were designed to complement and mimic the rules for Business Asset Disposal Relief (BADR – formerly Entrepreneurs’ Relief) to some extent. Investors’ Relief combines BADR and Enterprise Investment Scheme (EIS) legislation elements. It is designed to encourage entrepreneurial investors to bring new capital into uncited trading companies where the BADR or EIS/Seed EIS (SEIS) reliefs do not apply.
Investors’ Relief Highlights
- Individual investors are eligible for Investor’s Relief (IR), a Capital Gains Tax exemption.
- It decreases the Capital Gains Tax on the disposal of ordinary shares investments to 10% if the investments were made on or after March 17, 2016, and the sale is made after April 6, 2019, and the shares were held for at least three years.
- Investor’s Relief has a lifetime limit of £10 million.
- Investor’s Relief differs from Entrepreneur’s Relief in that it is meant for passive investors who are not actively participating in the firm. There is also no minimum proportion of shares that you must hold to qualify for this Relief.
Investors’ Relief is intended to encourage external investment. The investor can be an individual or a partnership, but not a limited liability partnership (LLP). Individuals whose natural source of capital gains relief on a disposal would be business asset disposal relief are not eligible for it. As a result, the majority of employees and directors will not be eligible for investor relief. Individual investors can get a CGT reduction on their ordinary share investments if they dispose of them.
Term Relevant Employee
Anyone who is an official of the issuing company, such as a director or company secretary, or anyone who is an employee of the issuing company is considered a “relevant employee.” The same applies to any associated company’s officials or workers.
CGT and Investor’s Relief
Any financial gain from selling a portion or all of a company or any commercial asset is subject to CGT in the corporate world. This involves the sale of shares and other securities. Entrepreneurs’ Relief is a tax relief that reduces a qualifying person’s CGT to a flat rate of 10% if they qualify.
Like Entrepreneur’s Relief, Investors’ Relief operates by reducing the amount of Capital Gains Tax that must be paid on the gain of the sale of qualifying shares. Those who meet the investors’ Relief requirements will only have to pay 10% CGT on any gains they get from the sale of shares. Dispositions must be made after April 6, 2019, and investments must be kept for three years and made on or after March 17, 2016. Furthermore, unlike enterprise asset disposal relief, no minimum number of shares in the company is required.
Investors’ Relief is still available if the investor’s shareholding comprises of both qualifying and non-qualifying shares. On the other hand, the shareholder can only claim investors’ Relief on the percentage of gain earned from qualified shares.
The Relief has a lifetime limit of £10 million, which is in addition to the amount payable through business asset disposal relief. The subscriber should not be an employee or official of the firm throughout the time of ownership, with two exceptions. The rules are complex and should be considered prior to the investment and monitored in the years following the acquisition.
Investors’ relief Exceptions
Although IR isn’t as generous as the more well-known Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) schemes, it includes businesses and trades that aren’t eligible for EIS, such as farming, hotels and real estate development. A few other exceptions are:
- The individual becomes an employee of the firm after a period of at least 180 days following subscription unless there was no reasonable chance of their becoming an employee at the time of subscription.
- After subscribing, the individual assumes the function of an unpaid (dividend-free) director, although having no prior ties to the firm.
Investors can benefit from Investors’ Relief since it is one of the most attractive tax relief alternatives available. However, high gain rewards aren’t easy to accomplish; double-check that you meet all of the requirements before submitting your claim.
Capital Gains Tax Payment
Capital Gains Tax is paid via the self-assessment system, and gains and losses must be reported on your tax return. The tax must be paid by January 31, following the year in which the gain occurred. If you do not qualify for any of the reliefs mentioned above, your tax rate will be applied to the gain after deducting your yearly exemption.
How Can Bloom Financials Help
It’s vital to think about how these taxes interact with others, as it is with many taxes. Stamp Duty, VAT, Income Tax, and Inheritance Tax are frequently combined in CGT tax planning, so don’t treat it as an individual matter. Bloom Financials has ample expertise assisting private clients on their business matters. When considering an investment, we can help you determine the applicability of IR and other potential reliefs to structure the most suitable transaction to meet the legal and eligibility requirements. If you have any questions concerning IR or any other venture capital tax reliefs, please feel free to contact us.
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