As the second post in our series in respect of the recent Budget, we take a look at the measures outlined in respect of CGT.
Capital Gains Tax (CGT)
The importance of understanding the tax allowances and rates for CGT is to take advantage of:
- the short term opportunity of using your annual exemption and any gain taxed at the lower rate (if part of your basic rate band is unused) which are both available annually on a “use it or lose it” basis
- the longer term opportunity for lifetime liquidity events such as selling your business and benefiting from the lower rate of CGT of 10%.
CGT annual exemption
The CGT annual exemption is El 2,000 for 2019/20 and El 2,300 for 2020/21.
CGT rates
The current rates of CGT are 10%, to the extent that any income tax basic rate band is available, and 20% thereafter. Higher rates of 18% and 28% apply for certain gains; mainly chargeable gains on residential properties with the exception of any element that qualifies for Private Residence Relief.
There are two specific types of disposal which potentially qualify for a 10% rate up to a lifetime limit for each individual:
- Entrepreneurs’ Relief (ER). This is targeted at directors and employees of companies who own at least 5% of the ordinary share capital in the company, provided other minimum criteria are also met, and the owners of unincorporated businesses
- Investors’ Relief. The main beneficiaries of this relief are external investors in unquoted trading companies who have newly-subscribed shares.
Investors’ Relief has a lifetime limit of El 0 million, however, the lifetime limit position for ER has been changed in the Budget and is considered further below.
Entrepreneurs’ Relief (ER)
In a very significant change, the lifetime limit is reduced from El 0 million to El million for ER qualifring disposals made on or after 1 1 March 2020.
There are special provisions for disposals entered into before 1 1 March 2020 that have not been completed.
The Government’s manifesto stated clearly that there would be a reform and review of this relief, so a reduction in the limit was not unexpected, though the magnitude of the reduction and the immediate implementation will be a disappointment to taxpayers contemplating a disposal in the short term.
Private Residence Relief (PRR)
Draft legislation has been issued to make changes to the PRR regime from 6 April 2020. For properties that have not been occupied throughout the entire period of ownership, available deductions for capital gains tax purposes will be amended as follows:
the final period exemption will be reduced from 18 months to nine months (there are no changes to the 36 months that are available to disabled persons or those in a care home)
- lettings relief will be reformed so that it only applies in those circumstances where the owner of the property is in shared occupancy with a tenant.
At present, lettings relief gives up to E40,000 for a couple who jointly own the property) for someone letting part, or all, of a property which is their main residence, or was their former main residence at some point.
Despite concerns raised during the consultation, the Government is proceeding as planned, and lettings reliefs will be abolished except in very limited circumstances of co-occupation with a tenant.
The changes apply for disposals on or after 6 April 2020, regardless ofwhen the period of letting took place.
Payments on account and 30-day returns
Legislation has been enacted to change reporting obligations for residential property gains chargeable on UK resident individuals, trustees and personal representatives. Also introduced is a requirement to make a payment on account ofthe associated CGT liability. For disposals made on or after 6 April 2020:
a tax return is required if there is a disposal of UK land on which a residential property gain accrues
- CGT is required to be computed on the reported gain in the tax return.
The return needs to be filed and the CGT paid within 30 days of the completion date of the property disposal.
The new requirements do not apply if a chargeable gain does not arise, for example where the gains are covered by PRR.
Ifyou have any concerns in respect ofyour liability for CGT, please contact us today.