Capital Gains Tax Relief for Ltd Companies and Individuals
To put it very simply, capital gains tax (CGT) is a tax which is charged when you give away, sell, exchange or dispose of an asset for the purpose of making a profit or ‘gain’. It’s typically applicable to investment funds, shares, second homes, inherited properties, business assets, the sale of an entire business, assets transferred at a lower value than their true market value, valuable and rare art, jewellery, antiques, etc.
Any money, profit or gain you obtain as a result of the sale of the above is subject to not only CGT but also capital gains tax relief for individuals. However, calculating it can be a rather complicated and often cumbersome process. This article explains what capital gains tax relief for Ltd. companies & individuals is and how to calculate it.
Capital Gains Tax Relief for Individuals
Every tax year, the vast majority of individuals residing in the UK are allowed to make capital gains up to a certain extent before they must pay CGT – they are entitled to an annual exemption or annual tax-free allowance, or simply, capital gains tax relief.
For the year 2021/22, individuals may be able to make gains of up to £12,300 tax-free. Individuals not domiciled in the UK (using the remittance basis of taxation) are not entitled to capital gains tax relief. Non-UK residents living here may be able to get relief on disposing UK land and property.
Other CGT relief for individuals include:
Hold over relief on gifts
This includes gifts received from people other than your civil partner or spouse. Hold over relief is the term used to imply that when you receive an ‘asset’ in the form of a gift, you don’t have to pay tax on the sale of that asset. A valuation must be conducted, however, before the asset can be gifted to someone else. At the time of the sale, any applicable gain will be calculated from the price the asset had when you received it as a gift.
Roll over relief upon replacement of business assets
This kind of capital gains tax relief for individuals is applicable when trading assets are sold and new assets are put in place, using the sale’s proceeds. This allows the CGT business asset gain to be deferred, where the asset must match with the replacement of a new asset within 1 year before and 3 years after the disposal.
This is where CGT relief applies to individual investors when they dispose investments in the form of ordinary shares. The relief effectively cuts down the tax rate on any capital gains by 10% for higher rate taxpaying investors. The relief applies as long as the disposals were made after April 6, 2019 and the investments were held for at least 3 years, having been made either on or after March 17, 2016. This capital gains tax relief for individuals is subject to a lifetime limit of £10M.
This lets individuals (sole traders and those in partnerships) claim CGT relief when:
- Gains made at the time a business is partially or fully disposed of;
- Gains made after disposing assets once a business has stopped trading;
- Gains made by specific individual shareholders where each shareholder has at least 5% issued share capital and minimum 5% voting rights.
The qualifying rate is 10% and a maximum lifetime relief of £10M can be claimed.
Entrepreneur’s relief is also available when disposing off partnership assets and gains which are subject to additional conditions.
EIS (enterprise investment scheme)
It is possible to “shelter” gains by investing in the shares of a qualifying and unquoted trading company. However, you need to invest the gain arising on the original disposal in 1 year before or 3 years after the original disposal.
While there’s no monetary limit on this kind of capital gains tax relief for individuals, the tax liability is not eliminated entirely but deferred.
Capital Gains Tax Relief for Ltd. Companies
Limited companies in the UK cannot claim relief on capital gains tax as they pay Corporation Tax. Still, it is important for limited company owners to be aware of what type of taxes they pay and how to claim relief on them.
How is CGT paid and are there exemptions?
CGT is paid through the standard self-assessment tax return system in the UK, after which claims can be calculated. The tax is payable each year by January 31, after the tax year in which the gain was made.
Some assets are exempt so you don’t have to pay CGT on them. These include:
- Any transfer of business assets between spouses or civil partners (transfers like these are seen as being made at zero gain or loss)
- Cars for personal use and classic/rare cars
- Saving certificates, SAYE contracts and premium bonds
- Business possessions where the disposal is at or under £6,000
- Majority of possessions where the underlying value naturally reduces over time
- The sale of your main or sole residence if occupied by yourself
- Charity gifts and those sent out to select sports clubs
- Life insurance policies still under the name of the original owner or beneficiaries
- And more
Closing thoughts on Capital Gains Tax for Ltd. Companies & Individuals
The rules for calculating gains (as well as relief) under CGT can be highly complex. If claimed through the right channels, there are multiple reliefs and exemptions available to individual/sole traders and those running a business in partnership, leading to significant savings.
All in all, this article does not include each and every relief which can be claimed under capital gains tax, and it is merely for general information purposes only. It is not intended to provide technical insight or guidance and should not be treated as such.
In order to better understand which ‘capital gains tax for individuals’ relief you qualify for, it’s a good idea to speak to a tax lawyer. If you are considering the disposal of any business assets and wish to understand how to claim the appropriate relief on CGT, please get in touch with us now.
To discuss how Accountants in Slough can assist you with your Accounts Preparation, please contact us for a free, no obligation consultation on: 01753 373 505 or complete our Contact form and we will get back to you.
Further information can be found here https://www.gov.uk/capital-gains-tax)