In Focus: Capital Gains Tax and Reliefs Explained

Capital Gains Tax (CGT) is a tax normally charged when a person disposes of an asset and makes a profit (gain) that is of a capital nature. The disposal of an asset occurs when it is no longer owned, for example following:

• a sale
• a transfer to someone else (e.g. by way of gift)
• an exchange for something else.

When deciding whether a charge to tax arises, there are a number of issues to consider:

• the asset and its disposal
• whether the 'consideration minus costs' calculation results in a gain
• an exemption or relief may apply
• there may be losses to set off against the gain.

In a farming context, CGT may be incurred on the sale of a farm, the sale of bare agricultural land (including land with planning permission for development), or where land is gifted to the next generation. It may also arise on the sale of farm equipment. CGT will arise on the sale of other types of property including on the sale of a second home or a property that you have rented out or these of business premises such as a shop or office building. It is important to consider in all cases whether you will be able to claim CGT reliefs which can reduce the amount of CGT that will be payable. These reliefs are discussed below.

Where an asset is disposed of under a binding contract for sale, the disposal date for CGT purposes will be the date of the contract (in other words, when beneficial ownership passes), and it will be this date, rather than the date of formal completion and payment of the purchase price, that will decide when CGT becomes payable. Be aware that there may also be a deemed disposal of assets in a trust at the point a beneficiary becomes absolutely entitled (for instance, on attaining an age condition).

The gain will be the difference between the consideration for the disposal (either sale price or market value) and the original acquisition cost of the asset (e.g. purchase price or probate value if the asset was inherited) less any costs incurred to buy, sell or improve the property. The costs that can be deducted include:

• improvement costs to increase the value of the property - but not normal maintenance costs;
• fees or commission for professional advice or services incurred in the acquisition or disposal of the asset - for example, capital gains tax valuations, solicitors' and estate agent or advertising fees; and
• Stamp Duty Land Tax and VAT

Costs that cannot be deducted include any interest on a loan to buy the asset and costs that can be claimed as business expenses.

In certain situations, the market value must be used as the disposal value, rather than the value of any consideration passing. This applies to a gift, and to a bargain made otherwise than at arm's length. If the parties to the transaction are connected with one another, this is deemed to be a bargain otherwise than at arm's length and the market value rule will apply. The market value for these purposes is the price the asset would be reasonably expected to fetch in a sale on the open market.

Other situations in which the usual ‘consideration minus costs’ rule does not apply include:

• Transfers between a married couple or civil partners, while living together; and
• Assets acquired on or before 31 March 1982, for which the acquisition cost will be its market value at that date.

The rate individuals pay depends on the size of the gain, their taxable income and whether their gain is from residential property or other assets.

Every individual has an Annual Exempt Amount (AEA), which is the first part of any gains within each tax year that will be exempt from CGT. This is £12,300 for the current tax year 2021 to 2022 and will be maintained at this rate for the tax years, 2022 to 2023, 2024 to 2025 and 2025 to 2026.

For a basic rate taxpayer with income within the basic rate income tax band (up to £50,000 for the tax years 2021 to 2022, 2022 to 2023, 2024 to 2025 and 2025 to 2026, the rate of CGT is as follows:

• the rate for residential property is 18% on the gains within this band when the gains are added to income for the year, and 28% on any amount above this; and
• the rate for other chargeable assets is 10% on the gains within this band when the gains are added to income for the year, and 20% on any amount above this.

For a higher rate (40%) or additional rate (45%) taxpayer the rate of CGT is as follows:

• 28% on the gains from residential property
• 20% on the gains from other chargeable assets.

The higher rate of 20% or 28% applies to trustees and to the personal representatives of someone who has died. Trustees have an AEA of half that of an individual (£6,150 for the tax years 2021 to 2022, 2022 to 2023, 2024 to 2025 and 2025 to 2026) while personal representatives have the same AEA as an individual, but only for the tax year of death and two subsequent tax years.

Companies pay corporation tax on their chargeable gains, so will pay corporation tax at the rate of 19% (25% with effect from 1 April 2023) regardless of whether the gains are from residential or non-residential property.

NOTE: The gain arising from a disposal of land may be subject to income tax and not CGT on the basis that the individual bought and sold the land in the course of the trade of dealing in land or has entered into a property development trade, for example by developing houses for sale. For more information see the CLA handbook HB CLA80 – Tax Issues and Development Land.

A variety of reliefs from CGT may apply to a disposal. Some of these are specifically available in relation to business assets. These may provide an exemption from tax, a reduction in the tax payable, or deferral of the tax for the future.

This applies to any period in which the property being disposed of was being used as the transferor’s main residence. It can also apply to the garden and grounds up to half a hectare in area, while larger areas of land may be included provided they are required for the reasonable enjoyment of the dwelling house. If the property has not been the main residence for the whole period of ownership, then there will need to be a calculation of which part of the gain is exempt – either based on historic valuations at the point it became/ceased to be a main residence, or simply by apportioning the total gain over the whole period.

Business asset roll-over relief may apply on replacement of business assets. The effect of roll-over relief is not to permanently exempt the gain on the disposal from tax, but in effect to defer the charge until the disposal of the replacement asset.

Where a business disposes of plant and machinery so that it can upgrade to more up-to-date equipment, or sells land and buildings so that it can relocate to new premises, it may realise a chargeable capital gain.

If the business in this situation were to suffer an immediate tax charge, this could act as a disincentive for businesses to modernise, expand or relocate; hence the existence of roll-over relief for business assets. The broad rationale behind the relief is that capital gains on business assets can remain untaxed for as long as the gains are reinvested in other assets used in the business.

Business asset roll-over relief can only be claimed where both the assets sold or disposed of and the new assets are qualifying assets that are used in a trading business.

The acquisition of the new assets must be within the statutory time limit, which is between one year before and three years after the date of disposal of the old asset, although HMRC may extend this time limit in exceptional circumstances.

There is a special form of roll-over relief which applies to land and buildings that disposed of to an authority exercising or having compulsory powers. This relief operates in a similar way to normal business asset roll-over relief in that replacement land has to be bought within one year or 3 years after the date of disposal, subject to any extension of this period granted by HMRC.

This relief is different from that for business assets in that the land that is compulsorily purchased and the replacement land does not have to be used in a trading business, so this relief can be claimed for farmland that is let out. However, this relief is less flexible than business asset roll-over relief which enables reinvestment in a wider range of qualifying assets. For example, the proceeds of sale cannot be reinvested in a new farm building on retained land or in shares in another business. It is not possible to claim the relief if reinvestment is made in a house which you intend to live in and in respect of which you can claim private residence relief on.

Hold-over relief is available in two circumstances:

• ‘business’ hold-over relief on disposals of certain types of business assets; and
• ‘general’ hold-over relief on certain disposals that give rise to a charge to inheritance tax but that are not a potentially exempt transfer

Business hold-over relief may be available if a qualifying business asset is given away, for example, when the management and ownership of the business are handed over to the next generation in your lifetime. General hold-over relief is usually applied where an individual makes a gift into a trust, or where assets are transferred out of a trust to an individual.

In both cases, the effect of hold-over relief is that that the chargeable gain is postponed until the asset is sold or disposed of by the person who received it. Both parties need to make a joint claim for the relief.

The recipient of the gift will need to take the relief into account when they work out their gain on the disposal of the asset. They replace the cost of the asset in their calculations with a lower amount. The lower amount is the market value of the asset at the time of the gift, less the 'held-over' or postponed gain. Note that where there is a held-over gain, the new owner cannot claim principal private residence relief.

Hold-over relief will be relevant when a farmer decides to pass on their farm or agricultural land during their lifetime. When land has been held for a long time, the increase in value and gain chargeable to CGT may be substantial. Agricultural land will generally qualify for business hold-over relief, which can therefore avoid incurring a substantial tax liability where there are no cash proceeds from a disposal with which to pay CGT.

For individuals and trustees (not companies), business asset disposal relief (known as entrepreneurs' relief before 6 April 2020) can apply in some circumstances to reduce the rate at which CGT is charged on qualifying gains made on the disposal of any of the following:

• all or part of a business;
• the assets of a business after it has stopped trading; or
• shares in a company

There is a maximum lifetime limit of £1 million total gains on which business asset disposal relief can be claimed (entrepreneurs’ relief had a threshold of £10 million for disposals made prior to 11 March 2020). It is also necessary to take into account the value of entrepreneurs’ relief claimed in respect of qualifying gains in the past.

The relief is only available for individuals if they meet certain qualifying conditions throughout the qualifying period of 2 years prior to the date of disposal. The individual must either be in business, for example as a sole trader or as a partner in a trading business, or hold shares in a personal trading company.

This relief is not available for disposals by companies. If the relief applies, CGT is due at 10%. The deadline for claiming business asset disposal relief is the 31 January following the end of the tax year in which the disposal took place.

Business asset disposal relief (formerly entrepreneurs’ relief) may be claimed on the disposal of a farm or agricultural land, where it was farmed by the owner, as an alternative to claiming roll-over or hold-over relief. This may be important if after selling the farm or land, the seller does not want to reinvest in new business assets. If cash is available, the original owner may decide to pay CGT at the 10% rate in order to pass on the land to the new owner (often family members such as their children) free of any accrued gain.

Capital gains are normally reported annually in your self assessment return. However, there are different rules if you sell or gift residential property, such as a second home or rental property on which private residence relief is not available. You must now submit a return to HMRC and pay any CGT due within 60 days following the completion date of the sale. Interest and penalties will be charged if the deadline is missed.

Reporting gains on residential property is done using the online service which can be accessed here. You’ll need a Government Gateway user ID and password. If you do not have a user ID, you can create one when you report and pay. If you complete a self-assessment return you will still need to report the capital gains in that return for the tax year when the sale took place, and at that point can any previous over- or underpayment can be corrected.

Agricultural land would qualify for the non-residential rate of CGT, i.e. 10% or 20% depending on the owner’s level of income. If sold as a business, the taxpayer may be able to qualify for Business Asset Disposal Relief (described above) in order to pay a tax rate of 10%. Note that if the land includes a farmhouse, cottage, or other residential property, part of the gain may be taxed at the residential rate (i.e. 18% or 28%).

In principle, CGT can apply to farm equipment if the sale results in a taxable gain. However, as HMRC regard all plant and machinery to be a wasting asset (that is as asset with a predictable life of less than fifty years) the sale will be affected by the special rules for wasting assets and you should seek specific professional advice.

If you had claimed capital allowances, such as the annual investment allowance, on the purchase of the farm equipment and its subsequent sale leads to a capital loss, the amount of the loss that can be carried forward will be restricted by the amount of the capital allowances claimed. There may also be a balancing allowance or balancing charge for capital allowance purposes. You should seek professional advice if these circumstances apply to you.

The rate of CGT will be the same regardless of whether planning permission has been granted, so long as no dwellings have yet been constructed. In these circumstances, care should be taken to ensure that you do not fall within the anti-avoidance rules that make the gain chargeable to income tax rather than CGT. For more information see the CLA handbook HB CLA80 – Tax Issues and Development Land.