Special Capital Gains Tax situations

Arthur Childs
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There are a number of special capital gains tax situations one or more of which you may need to take into account. 

These will not generally apply to most investors and so they have their own section.

Table of contents

Entrepreneurs’ Relief

One of the first special capital gains tax situations to look at is Entrepreneurs’ Relief. If you are in business then you may be able to tax at the lower rate of 10% on all gains on qualifying assets.  In principle, both spouses or civil partners can qualify for relief on up to £1 million of lifetime gains. This was reduced from £10 million with effect from 11 March 2020.

What if you are selling all, or part of, your business? Well to qualify you must be a sole trader or business partner and have owned the business for at least 2 years before the date you sell it.

If you are selling shares in a company you must be an employee or office holder of the company. In this case you must have owned at least 5% of the shares and voting rights for at least 2 years before you sell them. Furthermore the company’s main activities must be in trading rather than non-trading activities like investment.

Investors’ Relief

In 2016 Entrepreneurs’ Relief was extended. The aim was to provide an incentive for external investors to invest in unlisted trading companies. Provided you invest over the medium to long-term then you can claim Investors’ Relief.

As an external investor this you a 10% rate of capital gains tax. Provided that the gains accrued on the disposal of ordinary shares in an unlisted trading company.

For you to qualify, your shares have to be newly issued on or after 17 March 2016. They also need to have been held for a period of at least three years starting from 6 April 2016.

Your qualifying gains for investors’ relief will be subject to a lifetime cap of £10 million. And so this has not been reduced like Entrepreneurs’ Relief.

Employee share schemes

One of the more common special capital gains tax situations are employee share schemes. You might get shares through schemes such as Share Incentive Plans, Save As You Earn Schemes or Company Share Option Plans.

These schemes are approved by HMRC and have special rules.  If you follow the rules, you pay less capital gains tax when you sell or dispose of the shares. In some cases you will pay none at all.

Share incentive plans

With a share incentive plan you are treated for capital gains tax purposes as being absolutely entitled to the plan shares once you are awarded them.  If you keep your shares in the plan until you sell them you will not have to pay any capital gains tax on any gains you make. This is irrespective of how large those gains might be..

What if you take your shares out of the plan and sell them later? In this case you may have to pay capital gains tax on any increase in value after the shares come out of the plan.

Save as you earn schemes

Let us say that you want to compute a capital gain on the disposal of the shares you obtained via a tax-relieved Save As You Earn share option. In this case the base cost to be deducted from the disposal proceeds is:

  • the actual consideration (if any) given for the grant of the option, plus

  • the actual option exercise price paid when acquiring the shares

Company share option plans

Or you might want to compute a capital gain on disposal of the shares you obtained via a tax-relieved Company Share Option Plan. In this case the base cost to be deducted from the disposal proceeds is:

  • the actual consideration (if any) given for the grant of the option, plus

  • the actual option exercise price paid when acquiring the shares, plus

  • any amounts charged in respect of the grant of an approved Company Share Option Plan option

Capital Gains Tax and Trusts

Another of the special capital gains tax situations is that of using trusts. If you are a trustee you will be subject to capital gains tax unless the trust is not resident in the UK.  A trust is regarded as resident unless the majority of the trustees are not resident in the UK and the trust administration is outside the UK.

As a trustee you are responsible for reporting gains and paying the capital gains tax.  You are entitled to an annual exempt amount of 50% of the annual exempt amount for an individual, i.e. £6,150 in 2022/2023.

Trustees pay at the rate of 20% (or 28% for residential property).

Where a settlor has created a number of trusts the annual exemption is shared equally between them.  The minimum annual exemption is currently £1,230 (ie one-tenth of the individual annual exemption).

Bare Trusts – Any gains arising from the disposal of assets held subject to a bare trust will be assessed to tax on the beneficiary.  An individual beneficiary’s annual capital gains tax exemption will apply. This is to the extent that it has not already been used outside the context of the trust.  And of course the rate of tax may be just 10%.

During a review of trust tax law in 2003, there were suggestions that the capital gains tax treatment of bare trusts with a parental settlor should be brought in line with the equivalent income tax treatment. That is, so that gains would always be assessed in such circumstances on the parental settlor.  However the law has not been changed meaning that the attraction of bare trusts for own minor children on the grounds of capital gains tax efficiency continues.

Important

This information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances.

Information given relating to tax legislation is based on my understanding of legislation and practice currently in force. Whilst I believe my interpretation of current law and practice to be correct in these areas, I cannot be responsible for the effects of any future legislation or any change in interpretation or treatment. In particular you are warned that levels of tax and tax reliefs are subject to alteration and, in any case, the value of such reliefs and benefits may depend on an individual’s circumstances.

If you are in any doubt as to whether any course of action is suitable for you, then you should discuss the matter with a suitably qualified independent financial adviser or other specialist.