The following articles have been extracted under a licence from HM Revenue & Customs website:
Introduction
Assets and disposals
Working out the chargeable gain
Reliefs (other than taper relief)
Allowable losses
Taper relief: qualifying holding period
Taper relief: business assets and non-business assets
Working out the tapered chargeable gains
Working out the amount chargeable to CGT
Working out the tax due
Post transaction valuation checks for CGT
Indexation allowance
Taper relief on disposals of business assets on or before 5 April 2000
Introduction
This series of articles tell you the basic rules of Capital Gains Tax (CGT) for individuals.
This article addresses taper relief and your assets. Taper relief reduces the total chargeable amount of tax, depending on how long the asset has been owned. The relief is available to individuals, trustees and personal representatives. However, taper relief cannot be claimed by companies, as they are potentially eligible to claim indexation allowance instead.
The article covers only common situations and does not contain all the guidance you will need to work out your chargeable gain, allowable, loss or relief in every case, or how much CGT you will have to pay.
Two sorts of assets
There are two different rates of taper relief for business assets and for non-business assets. This section now shows you what a business asset is for the purpose of taper relief. Assets that are not business assets are ‘non-business assets’.
If your asset has been partly a business asset and partly a non-business asset, you should look at the passage “What if I used an asset only partly as a business asset or for only part of the time as a business asset”?
What is a business asset?
A business asset is
- an asset other than shares that is used for the purpose of a trade, profession or vocation carried on by -you (either alone or in partnership), or -a qualifying company, or
- an asset other than shares used for the purpose of your full-time or part-time employment with an employer who carries on a trade (for any period before 6 April 2000, the employment must have been full-time), or
- shares or securities held in a qualifying company.
If you acquired an asset as legatee, there are different rules for deciding whether it was a business asset in the time that the asset was held by the personal representatives. There are also different rules for assets owned by trusts.
From 6 April 2004 a business asset will include an asset other than shares that is used wholly or partly for the purposes of a trade carried on by individuals, trustees of settlements, personal representatives or certain partnerships. The owner of the asset does not need to be involved in carrying on the trade concerned.
What is a qualifying company?
There are different rules for deciding whether a company is a qualifying company;
- before and from 6 April 2000,
- depending on whether or not you are an employee or officer of the company.
These rules are set out separately below.
Please see also the chart that summarises the rules for the period from 6 April 2000.
If you owned shares in a company both before and from 6 April 2000, you need to apply the tests separately to see whether the company was a qualifying company in the period up to 5 April 2000 and in the period from 6 April 2000.
Similarly, if you were an employee or officer of a company for some of the time that you owned shares in it, you will need to apply the tests separately to see whether the company was a qualifying company while you were an employee and when you were not. See “What if I have shares in the company where I work and then retire”?
If the company was a qualifying company in one period but not in the other, you should see the passage What if I used an asset only partly as a business asset or for only part of the time as a business asset?
What is a qualifying company for employees and officers from 6 April 2000?
From 6 April 2000, if you are an employee or officer of a company, or of a connected company, the company will be a qualifying company if
- you do not have a material interest in the company, or if
- the company is a trading company or the holding company of a trading group.
If you do not have a material interest in the company, then you do not need to find out whether it is a trading company or the holding company of a trading group.
If you do have a material interest in the company, you may still qualify for business assets taper relief if the company is a trading company.
The terms in italics are all described later on in this section.
When do I have a material interest in a company?
You have a material interest if you have any one or more of
- more than 10% of any class of share or security in the company
- more than 10% of the voting rights in the company
- rights to more than 10% of the income of the company
- rights to more than 10% of the company’s assets if the company is wound up.
When you are working out whether you have a material interest, you have to add in the interests of people who are connected to you. See “Who are connected persons”?
Example
You have 8% of the Class A shares in the company. Your daughter has 6% of the Class A shares.
As you and your daughter are connected persons, you are both treated as having 14% of the shares.
So both of you will have a material interest in the company and it will not be a qualifying company for you (unless it is a trading company).
You should also add in any shares or rights that you do not have at the moment, but that you are entitled to acquire in the future, whether by options, conditional contracts or other means.
Example
You have 8% of the Class A shares in the company.
You also have:
- options to acquire shares that would amount to 5% of the present number of the company’s Class A shares, and
- your contract with the company says that you will be given shares amounting to 4% of the present number of the Class A shares if profits reach a certain level.
If the company has already issued the shares that you have a right to acquire, then you are treated as having 17% of the shares.
There is a special rule for calculating the percentage if the shares you have a right to acquire have not already been issued by the company and would be issued if you exercised your right. The shares that you may acquire are added both to your holding and to the total number of shares. So
- you are treating as holding 8 + 5 + 4 = 17 shares
- the company’s total shares in issue are treated as being 100 + 5 + 4 = 109
In this case, you are treated as having 17/109 = 15.6% of the shares.
Either way, you will have a material interest in the company and it will not be a qualifying company for you (unless it is a trading company).
What if my interest in the company changes?
Your interest in the company may sometimes be a material interest and sometimes not. For example, you may buy or sell some shares and therefore go over or come under the 10% figure for the material interest test.
You should then assess whether the company is a qualifying company separately for the times when you have a material interest and when you do not.
If the company is a trading company at times when you have a material interest in it, it will still be a qualifying company.
Otherwise, it will be a qualifying company for some of the time and not at other times. As a result, your shares will be business assets for some of the time and not for others. See What if I used an asset only partly as a business asset or for only part of the time as a business asset?
Example
You are a director of a non-trading company. No person connected with you has any shares in the company and you have no option or other right to acquire shares in the future.
On 1 May 2001 you buy 5% of the shares. On 13 June 2004 you buy an additional 10%. On 5 August 2007 you sell all your shares.
From 1 May 2001 to 12 June 2004 you do not have a material interest. So the company is a qualifying company for you and the shares are business assets in respect of that time.
From 13 June 2004 to 5 August 2007 your total shareholding is 15%, so you do have a material interest. That means that the company is not a qualifying company for you, and the shares are non-business assets for that time.
What if I work for a company that is connected to the company whose shares I own?
If you are an employee of a company that has a relevant connection to the company whose shares you own, you are treated for taper relief as though you were an employee of that company.
Companies that have a relevant connection with each other include:
- parents and subsidiaries
- qualifying joint enterprise companies and the companies that make qualifying investments in them.
If you are not sure whether the company where you work is connected for taper relief purposes to the company whose shares you own, ask your employer. The company can ask its Tax Office for help if it is not sure.
Who is an officer of a company?
All directors, including non-executive directors, are officers of a company.
What is a qualifying company for outside investors from 6 April 2000?
If you are not an employee or officer of a company, then, from 6 April 2000, a qualifying company includes
- any trading company, or holding company of a trading group, provided it is not listed on a recognised stock exchange and is not a subsidiary of such a listed company;
- any listed trading company, or holding company of a trading group, provided you control not less than 5% of the voting rights in the company.
So, if you are not an employee or officer of the company, the company (or group) must be trading (see below) if you are to qualify for business assets taper relief.
What is a qualifying company before 6 April 2000?
For any period before 6 April 2000, a qualifying company was a trading company or the holding company of a trading group in which you either
- were able to exercise not less than 25% of the voting rights, or
- were a full-time working officer or employee and were able to exercise not less than 5% of the voting rights.
What is a trading company?
This is a company all, or substantially all, of whose activities are trading.
If a company has significant non-trading activities, it will not qualify as a trading company, even if its main activity is trading. Most commercial activities are trades, but property investment (apart from furnished holiday lettings) and investment in shares are not trades.
If you are unsure whether a company in which you own shares is a trading company, ask the company. The company can ask its Tax Office for help if it is not sure.
What is the holding company of a trading group?
Different rules apply for the periods before and after 17 April 2002.
- From 17 April 2002, a holding company is any company which holds shares in companies where it owns more than 50% of the shares
- Before 17 April 2002, a holding company is a company whose business (ignoring its own trade) is wholly or mainly to hold shares in companies where it owns more than 50% of the shares.
The holding company together with these subsidiaries is the group.
The group is a trading group if all, or substantially all, of its activities are trading.
If you are unsure whether a company is the holding company of a trading group, ask the company.
What is a recognised stock exchange?
The London Stock Exchange is a recognised stock exchange. Shares traded on the Alternative Investment Market (AIM) are not listed on a recognised stock exchange.
For a full list, see “recognised stock exchanges”.
Summary chart for qualifying companies
The chart below summarises the ways in which a company may be a qualifying company for an individual for periods from 6 April 2000.
If you and the company do not meet the conditions shown, then the company will not be a qualifying company for you.
Is non-residential property that I let out a business asset?
In general, let property is a non-business asset. That is the case even when for income tax purposes the profits of your letting business are worked out as though you were carrying on a trade.
Example
You own the premises of a supermarket. They are let to a listed trading company which uses them for its trade. You are not an employee or officer of the company and you do not have 5% of the votes, so it is not a qualifying company for you.
You own a warehouse. It is let to some individuals trading in a partnership, of which you are not a member, who use it for a trade.
You own some offices. They are let to an investment company. It does not carry on a trade.
All of these are non-business assets. From 6 April 2004 the warehouse in the second example will be classified as a business asset (see “What is a business asset?”).
However, property that is used by a qualifying company for the purpose of its trade is a business asset. (See “What is a qualifying company”? and look at “What is a trading company”? for the description of a ‘trade’.)
Example
On 6 June 2000 you bought a factory building. You sell it in 2010.
Throughout the time that you owned it, it was let to an unlisted trading company which uses the factory for a trade.
The factory is a business asset because an unlisted trading company is a qualifying company. This is the case even if you do not own any shares in the company.
Remember that there are different rules for what is a qualifying company for the period before and after 6 April 2000.
Is residential property that I let out a business asset?
Almost all residential property is a non-business asset. That is the case even when for the purposes of income tax the profits of your property business are worked out in the same way as if you were carrying on a trade.
Example
You own some flats in London. They are let to students. You pay income tax on the rental income less expenditure.
The flats are non-business assets.
Property that is used by you in a business of providing furnished holiday lettings may be a business asset. (If you need to know what qualifies as a furnished holiday lettings business you can look on the Notes on Land and Property pages of the tax return or ask your Tax Office.)
Residential property let to an individual will only be a business asset if you are carrying on a trade and the individual occupies the property for the purposes of that trade. Letting property is not a trade.
Example
You are a farmer. You own a cottage. It is let as a tied cottage to a worker on your farm.
The cottage is a business asset.
Residential property let to a qualifying company and used by it for the purposes of a trade will also be a business asset. (See What is a qualifying company? and look at What is a trading company? for the description of a ‘trade’.)
Example
You own a cottage and a house in the village. They are both let to an unlisted farming company. It uses the cottage as tied accommodation for a worker on the company’s farm. It rents the house to an individual who has no other connection with the company.
You also recently acquired a flat in London. It is let to an unlisted trading company which uses it to house its employees when they are posted to London to work in the company’s trade, as part of the relocation package.
Both the cottage and the flat are business assets, as they are used by qualifying companies for their trades. The house is not a business asset, as the company is not using it for its trade, but for a rental business (renting out property is not a trade).
What if I used an asset only partly as a business asset or for only part of the time as a business asset?
You may have an asset that has been both a business asset and a non-business asset, for example:
- an asset may have had both business and non-business use at the same time. For example, you might have owned a building, part of which was used by you as a shop and part of which was let out as a flat, and
- an asset might have been a business asset for some of the time and a non-business asset at another time. For example, you might own a few shares in an unlisted trading company where you do not work. These shares would be business assets (after 6 April 2000). If the company becomes listed, they would stop being business assets from the date of listing.
When you look at whether an asset was a business asset or a non-business asset, you look only at the ‘relevant period of ownership’ which is the shorter of
- the last ten years of the time you owned it up to the date of disposal, or
- the time you owned it from 6 April 1998 up to the date of disposal.
Example
You bought an asset on 6 June 2000. You sell it on 15 July 2015. The relevant period of ownership runs from 15 July 2005 to 15 July 2015.
Example
You bought an asset on 1 January 1992. You sell it on 6 June 2001. The relevant period of ownership runs from 6 April 1998 to 6 June 2001.
If you have disposed of an asset which you used partly as a business asset and partly as a non-business asset during the relevant period of ownership, then you have to apportion the chargeable gain into a gain on a business asset and a gain on a non-business asset. You will qualify for business asset taper relief on one part and non-business asset taper relief on the other part. You work out the amount of each relief using the full qualifying holding period. See Appendix 4 and Help Sheet IR279: Taper Relief.
What if I have shares in the company where I work and then retire?
If you own shares in the company for which you work, they are likely to be business assets to the date of your retirement. However, they may stop being business assets at that point because you are no longer an employee of the company. They will continue to be business assets after your retirement if the company is a qualifying company for non-employees, for example, if it is an unlisted trading company.
Retirement does not stop the shares being business assets before retirement. You will carry on receiving the benefit of business asset taper on part of your chargeable gain for as long as the time when the shares were business assets is within the relevant period of ownership when you come to dispose of them.
When you come to dispose of the shares you may need to apportion the chargeable gain into a chargeable gain on a business asset and a chargeable gain on a non-business asset, see the previous passage.
Example
On 1 June 2001 you bought some shares in the listed trading company where you worked. You never controlled at least 5% of the votes. You retired from the company on 1 June 2003. On 1 June 2006 you sold the shares.
The relevant period of ownership is from 1 June 2001 to 1 June 2006 – five years.
The shares were a business asset from 1 June 2001 to 1 June 2003 – two years.
The shares were a non-business asset from 1 June 2003 to 1 June 2006 – three years.
Therefore two fifths of the overall gain is treated as a gain on a business asset and three fifths is treated as a gain on a non-business asset.
Example
On 13 August 2000, you bought some shares in the unlisted trading company where you were employed. You never had a material interest of more than 10% in the company. You left the company on 3 September 2002. You sold the shares on 1 December 2005.
Because you were an employee and you did not have a material interest, you knew that the shares were business assets at first without having to consider whether the company was trading.
After you left the company, the shares continued to be business assets because they were in an unlisted trading company.
So you qualify for the maximum rate of business assets taper relief (two or more years).
What about assets I acquired from my husband or wife?
If you acquired an asset other than shares or securities from your husband or wife, it will be treated as a business asset during the Relevant Period of Ownership:
- at any time in the combined period when you or your husband or wife owned it when it qualified as a business asset by reference to you, and
- at any time before your husband or wife disposed of it to you when it qualified as a business asset by reference to your husband or wife.
Example
Several years ago, your husband bought a property. Subsequently, he gave it to you. Some time later, you sell it. Throughout, you have occupied the property for the purposes of your trade.
The property is treated as a business asset throughout the combined period when you and your husband owned it, because throughout that period you used it for your trade.
If you acquired shares or securities from your husband or wife, they will be treated as business assets at any time during the Relevant Period of Ownership in the combined period when you or your husband or wife owned them when they qualified by reference to your circumstances.
Example
In 1996, your husband bought some shares in ABC Ltd, a listed trading company. He transferred the shares to you on 6 April 2001. Neither of you ever controlled at least 5% of the voting rights. You sold the shares on 6 April 2006.
Your husband never worked for ABC, but you started to work for ABC in 1996 and were still employed there when you sold the shares.
The relevant period of ownership runs from 6 April 1998 to 6 April 2006 – eight years.
In that time, the shares were a non-business asset from 6 April 1998 to 6 April 2000 (two years) and a business asset from 6 April 2000 to 6 April 2006 (six years). That is because they qualify as business assets from 6 April 2000 because you worked for the company and either you or your husband owned the shares at the time.
What do I do next?
The next article shows you how to apply taper relief to work out your tapered chargeable gains.
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