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The higher rate of capital gains tax (CGT) for chargeable gains on the disposal of chargeable assets (not including residential property gains and carried interest gains) will be increased from 20% to 24% for higher and additional rate taxpayers.
To the extent that gains fall within an individual’s basic rate band, the applicable tax rate has also increased from 10% to 18%.
These increases will align the main rates of CGT to the residential property rates.
Business asset disposal relief (BADR) is a CGT relief which reduces the CGT rate on qualifying gains made on disposal of eligible business assets from 20% to 10%. Various conditions must be met to qualify for the relief.
Broadly, BADR is available to individuals who are actively involved in a business, whether as a sole trader, a partner in a partnership or via a company.
BADR is also available to individuals disposing of shares acquired on the exercise of qualifying enterprise management incentive (EMI) employee share options where there are at least two years between the date of grant of the EMI option and the sale of the shares acquired on option exercise.
Each individual is able to claim BADR on up to £1m of gains in a lifetime, which can result in a tax saving of up to £100,000. Trustees can claim BADR if certain conditions are met, which include the trustees having an interest in a business in which a trust beneficiary is personally eligible for BADR.
A different relief, investors’ relief (IR), is available in certain circumstances and also results in a 10% CGT rate on up to £10m of qualifying gains over an individual’s lifetime. Broadly, IR is available on gains made on disposal of shares in a qualifying unlisted trading company where an individual who made the gain subscribed for the shares and is neither an employee nor a paid director of a company.
The Chancellor has announced that the lifetime limit of IR will be reduced to £1m of gains, to bring it in line with BADR.
In addition, the Chancellor has announced an increase to the CGT rates where BADR and IR apply, to 14% from 6 April 2025 and a further increase to 18% from 6 April 2026.
Individuals, trustees and personal representatives who realise capital gains will in most cases encounter an increased CGT rate.
The increases in the CGT rates where BADR or IR apply will affect all taxpayers who are eligible for these reliefs.
The reduction in IR will affect all taxpayers who were hoping to benefit from IR on total lifetime gains in excess of £10m and had not completed the disposal prior to 30 October 2024.
The increases to the rates will affect individuals who own an interest in a business or shares in their employer, or have qualifying IR shares, who were expecting to only pay tax at 10% on the gains up to certain limits.
Employees who qualify for any of HMRC’s three tax advantaged share option plans available in the UK – the Save as you Earn (or Sharesave) Plan, the Company Share Option Plan and the Enterprise Management Incentive Plan – will also be affected by the changes to CGT rates.
The changes to the main rates of CGT will take immediate effect from 30 October 2024.
Anti-forestalling will apply to contracts that exchanged before 30 October 2024 and complete after CGT rates change. Anti-forestalling is also being introduced for certain elections that can bring forward disposal dates on a reorganisation for business asset disposal and investors’ relief purposes.
The reduction to the IR lifetime limit will apply to disposals on or after 30 October 2024.
The increase in the CGT rate to 14% where BADR or IR applies will take effect from 6 April 2025. The increase in the rate to 18% will take affect from 6 April 2026.
While these CGT changes will disappoint anyone adversely affected, the increases to the main rates of CGT are less drastic than the alignment of CGT rates with income tax rates, which was a subject of wide speculation.
Aligning the main CGT rates to the residential property rates will mean there are overall fewer rates of CGT, which can be viewed as a tax simplification.
The changes to BADR and IR are also less drastic than their complete abolition, which was also considered a possibility. It is pleasing to see that the government has decided to retain these reliefs, albeit it has reduced the limit for IR and is gradually increasing the rates to bring them in line with the basic rate of CGT.
CGT rates continue to apply to HMRC tax advantaged share option plans. While CGT rates have increased, these share schemes remain of interest to employees and employers.