Capital Gains & The Investors’ Relief
Background
With effect from 6 April 2016, the tax rates for Capital Gains Tax (“CGT”) have changed. Previously, the rates were 18% or 28% after deducting the tax free Annual Exemption (£11,100 since 6 April 2016). The 18% applied to the extent that the gain fell within an individuals basic rate (20%) band of income tax.
For example, in March 2016 a person with a salary of £12,000 and no other income besides a capital gain of £50,000 would have been taxed a gain of about £30,000 (the reminder of their basic rate band after deducting their salary plus the personal allowance) at 18% with the balance at 28%, after deducting the Annual Exemption. Leaving a CGT bill of about £7,832.
New CGT Rates
From 6 April 2016, there are different tax rates depending on the asset sold. If the asset is a residential property, then the old tax rates continue to apply. If the gain relates to any other asset, such as shares in a quoted company, then 10% or 20% will apply instead of 18% or 28%.
Applying the new percentages to the example shown above, the CGT bill falls to £4,720 – a drop of 40%.
The CGT treatment is particularly beneficial in comparison to income tax rates, with a top rate of 45%.
The Investors’ Relief
In the 2016 Finance Bill, the Chancellor George Osborne announced a new CGT relief. This applies a 10% rate of CGT in certain circumstances. It is similar to Entrepreneur’s Relief but with some important distinctions. The key points and conditions are broadly as follows:
- The relief applies to gains on the sale of shares in unquoted trading companies or a parent company of a trading group.
- The investor or their spouse or civil partner must subscribe for the shares (note that purchasing the shares from another shareholder is not sufficient).
- The investor cannot be an officer or employee of the company, nor can anyone connected with them (this is the opposite to Entrepreneurs Relief).
- The investor or his associate cannot receive any value over £1,000 from the company for the 4 year period starting 1 year before the shares were issued.
- There is a lifetime limit for the relief of £10 million (similarly to Entrepreneurs’ Relief).
- The relief works side by side with Entrepreneurs’ Relief so that two £10 million limits can be received if the conditions are satisfied.
- The relief only applies to individuals, not companies or trusts.
An important point to note is that shares listed on the Alternative Investment Market (AIM) are treated as unquoted for this relief, unless the company has a second listing elsewhere. ‘Connected person’ has a very broad definition, it includes spouse, relative (brother, sister, ancestor or descendant), spouses of a relative and your spouses relatives.
This is a broad summary of a complex new relief and these topics are still subject to change in the Finance Bill 2016. The Bill will be finalised when it receives Royal Asset later in the year. If you would like more information or if you require advice on a CGT issue please contact our Tax Director, Jenny Marks.
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