Capital Gains Tax- What’s In The Small Print?

The recent budget introduced some highly anticipated changes to Capital Gains Tax (CGT). The expected alignment of Capital Gains Tax rates with Income Tax rates didn’t materialise and instead, the government opted for more modest increases in the rates.

These changes have been highly publicised but there are a number of small details in the announcements which could have a significant impact on those who have already made a disposal or are about to make a disposal.

Capital Gains Tax Rate Changes

The changes are summarised below:

• On budget day, Capital Gains Tax rates increased from 10% to 18% for basic rate taxpayers and 20% to 24% for higher and additional rate taxpayers.  This is the first time in a number of years there has been an increase in rates mid-tax year.  These rates are now the same as the rates applicable to disposals of residential property which were set in the previous budget.
• Private Equity individuals see their rate of Capital Gains Tax on carried interest rate rise from 18% (basic rate) and 28% (higher and additional rate) to a flat rate of 32% from 6 April 2025.  From 6 April 2026, there will be a reform of the rules. Broadly the CGT  regime will be abolished and all carried interest will be subject to Income Tax rates, although reductions will be available in some circumstances.

Business Asset Disposal Relief (BADR) and Investors’ Relief (IR)

Business Asset Disposal Relief, formerly known as Entrepreneurs’ Relief, applies a reduced rate of Capital Gains Tax on the disposal of qualifying shares and business interests.

Similarly, IR applies a reduced rate of Capital Gains Tax on the disposal of unlisted shares, usually where the shareholder is not an employee of the company, subject to other conditions.

Both of these reliefs saw changes introduced in the budget as follows:

• CGT  rate unchanged on budget day and remains at 10% until 5 April 2025
• That rate is increasing to 14% from 6 April 2025
• Subsequent CGT  rate increase to 18% from 6 April 2026
• The lifetime allowance for BADR is £1m, which means that £1m of gains can benefit from the reduced rate. The equivalent allowance for IR was £10m, reduced to £1m on disposals post 30 October 2024.

ANTI-FORESTALLING RULES

The government have implemented anti-forestalling rules to prevent taxpayers from entering into unconditional contracts which are not completed until a later date to benefit from lower Capital Gains Tax rates. This applies to contracts entered into pre-budget as well as contracts where Business Asset Disposal Relief or Investors Relief is available and are not completed until after 6 April 2025 (when the first Capital Gains Tax rise comes into effect).  There are some let outs for commercial contracts where it can be demonstrated the purpose of the contract was not to obtain a tax advantage.

Where the proceeds of a share transaction is paid not in cash but in shares (or a mix of both cash and shares), normally the element of non-cash proceeds is not taxable as a rollover relief is available.  For transactions qualifying for Business Asset Disposal Relief or Investors Relief, it can be beneficial to elect out of those rollover provisions and utilise the lower rate of Capital Gains Tax, particularly where the shares acquired will not qualify for BADR or IR on a later transaction.  This election needs to be made by 31 January following the end of the tax year in which the transaction took place.  In practice, this election is often made with the Self-Assessment Tax Return.

However, the anti-forestalling rules now broadly provide that the rate of tax applicable is not driven by the date of the transaction but by the date, the election is made.  For example, a transaction between Budget Day and 5 April 2025 will need to have the election submitted by 5 April 2025 to benefit from the 10% rate.  An election made after 5 April 2025 means the 14% rate of Capital Gains Tax will apply.

Similarly, if a transaction qualifies for IR and the election wasn’t made pre-budget, the lifetime limit for that gain is now £1m rather than the £10m before the budget.

These deadlines are tight and require elections to be made in advance of filing the Self-Assessment Tax Return.

If you have any queries about the changes to Capital Gains Tax or any of the other changes announced in the Autumn Budget please do not hesitate to get in contact with Jill Walker, Aimee Ingram, or your usual AAB contact.