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 a relief reducing 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.
When do I have to work out taper relief?
You only have to work out taper relief if your chargeable gains after allowable losses are more than the annual exempt amount for the year.
How does taper relief work?
Taper relief reduces a chargeable gain after losses according to how long you held the asset before you disposed of it.
The relief is given after all other reliefs and allowable losses.
The amount of the reduction depends on
- how long you held the asset (the qualifying holding period), and
- whether the asset was a business asset or a non-business asset (see article 7 Taper relief, business assets and non-business assets).
If you have disposed of an asset on or after 6 April 2002, the amount of the chargeable gain on the asset (after deducting allowable losses) remaining chargeable to tax after taper relief is as follows:
|
Business asset |
Non-business asset |
|
Number of whole
years in the qualifying
holding period |
Gain remaining
chargeable
(%) |
Number of whole
years in the qualifying
holding period |
Gain remaining
chargeable
(%) |
|
Less than 1 |
100 |
Less than 1 |
100 |
|
1 |
50 |
1 |
100 |
|
2 or more |
25 |
2 |
100 |
|
|
|
3 |
95 |
|
|
|
4 |
90 |
|
|
|
5 |
85 |
|
|
|
6 |
80 |
|
|
|
7 |
75 |
|
|
|
8 |
70 |
|
|
|
9 |
65 |
|
|
|
10 or more |
60 |
Example
You dispose of a non-business asset. There are seven years in the qualifying holding period. You have no allowable loss. The chargeable gain is £10,000.
The percentage to use in the taper calculation is 75%. After taper relief, only 75% of £10,000, that is, £7,500, remains chargeable to CGT.
See article 8 Working out the tapered article gains for fuller guidance on how to make the calculations.
The percentages for non-business assets have not changed since 6 April 1998, but different percentages applied for disposals of business assets from 6 April 1998 and before 6 April 2002 (see article 13).
Do all chargeable gains attract taper relief?
Most chargeable gains attract taper relief if the assets have been held for long enough to qualify.
There are a few types of chargeable gain that never attract taper relief. These are:
- royalties received under mineral leases;
- cash sums received when a mutual building society or insurance society demutualises;
- certain amounts attributed to you as settlor of a trust after you have been temporarily non-resident;
- amounts attributed to you as beneficiary of a trust that is non-resident or dual resident;
- gains of certain non-resident close companies (broadly, a company controlled by five or fewer participators) that are attributed to you.
What is the qualifying holding period?
This is the period you held the asset, beginning on the later of
- the date on which you acquired the asset, or
- 6 April 1998
and ending with the date you disposed of the asset. You then have to work out how many whole years are in the qualifying holding period before looking up the taper rate in the table.
If you acquired the asset before 17 March 1998, you may qualify for a bonus year.
What is the date of acquisition of an asset?
The rules for working out the date of acquisition are normally the same as for the date of disposal, see article 2 assets and disposals.
However, there are some exceptions.
1) Where you acquire shares by exercising a qualifying Enterprise Management Incentives share option or where you acquire shares under an approved Share Incentive Plan. For information about both of these see Help Sheet IR287: Employee Share Schemes and Capital Gains Tax, and our website.
2) There are different rules if you acquired the asset from your husband or wife, see What is the qualifying holding period for assets I acquired from my husband or wife?
3) If you acquired an asset as legatee, you are normally treated as having acquired it on the date of death of the testator.
What is a whole year?
This is any continuous period of 12 months. It does not have to coincide with a tax year.
Fractions of a year are ignored.
If you dispose of an asset on the anniversary of its acquisition, you are treated as having held it for a whole year, but not if it is disposed of before then.
Example
You acquired an asset on 1 June 1998 and sell it on 1 July 2004.
As you held the asset for six years and 31 days, there are six whole years in the qualifying holding period.
If the asset was a business asset, 25% of the chargeable gain after losses remains chargeable. If the asset was a non-business asset, 80% of the chargeable gain after losses remains chargeable.
Example
You acquired shares on 15 November 2000 and sell them on 1 December 2002.
As you held the shares for two years and 17 days, there are two whole years in the qualifying holding period.
If the shares were business assets, 25% of the chargeable gain after losses remains chargeable. If the shares were non-business assets, 100% of the chargeable gain after losses remains chargeable (in other words, you do not qualify for any taper relief).
Example
You acquired an asset on 1 June 2000 and sell it on 1 June 2004.
As you sold the asset on the anniversary of its acquisition, you have completed a fourth whole year in the qualifying holding period.
If the asset was a business asset, 25% of the chargeable gain after losses remains chargeable. If the asset was a non-business asset, 90% of the chargeable gain after losses remains chargeable.
Example
You acquired an asset on 4 August 2000 and sell it on 3 August 2001.
As you sold it before the first anniversary of its acquisition, there is no whole year in the qualifying holding period.
So there is no taper relief and the whole of the chargeable gain remains chargeable.
When do I qualify for a bonus year?
You qualify for a bonus year if you dispose of a non-business asset which you had acquired before 17 March 1998 and which you still owned on 6 April 1998.
You also qualify if before 6 April 2000 you disposed of a business asset which you had acquired before 17 March 1998 and which you still owned on 6 April 1998.
If you qualify for a bonus year, you first work out the number of whole years in the qualifying holding period in the normal way. You then add one year to the result to give you the number of whole years including the bonus year. You use that total when referring to the taper table at the start of this article.
It is the number of whole years plus the bonus year that tells you how much taper relief you can have.
Example
You acquired a non-business asset on 6 April 1996 and sell it on 5 May 2000.
As you acquired the asset before 17 March 1998, you qualify for a bonus year.
As you acquired the asset before 6 April 1998, the qualifying holding period runs from that date.
You held the asset for two years and 30 days from 6 April 1998, so the number of whole years in the qualifying holding period is two. You add on the bonus year to give you three whole years.
Therefore, 95% of the chargeable gain after losses remains chargeable.
What if I have incurred enhancement costs?
The date of any enhancement expenditure is irrelevant. You work out the qualifying holding period by reference to the date you acquired the asset, or 6 April 1998 if later.
How are rights issues and bonus issues treated?
You may have been issued with new shares in a company under a rights issue or a bonus issue. Under a rights issue you have to pay for the new shares. Under a bonus issue (sometimes called a scrip or capitalisation issue) you receive the new shares free of charge.
For CGT, these kinds of share issue are normally treated as a reorganisation of the companys existing share capital and not as a new acquisition of shares. So, if you dispose of such shares, you work out the qualifying holding period for taper relief by reference to the date you acquired the original shares to which the rights issue or bonus issue related, and not the date on which you were issued with the new shares. If you acquired the original shares on different dates, you apportion the new shares to the different acquisitions, reflecting the proportion of shares acquired on the different dates.
Shares or units you acquired on or after 6 April 1982 and on or before 5 April 1998 will be pooled. The share pooling rules are set out in Section 3 under the heading The share identification rules.
There are different rules for rights issues by an Enterprise Investment Scheme company or a Venture Capital Trust, see Help Sheets IR297: Enterprise Investment Scheme and Capital Gains Tax and IR298: Venture Capital Trusts and Capital Gains Tax.
How are scrip dividends treated?
A scrip dividend (sometimes called a stock dividend) is a dividend paid by a company in the form of additional shares, rather than in cash.
For CGT, shares acquired in this way after 5 April 1998 are treated as a new acquisition. Therefore, you work out the qualifying holding period by reference to the date on which you received the scrip dividend shares.
Shares acquired in this way on or before 5 April 1998 are treated like a rights issue.
What happens when a mutual society demutualises?
In general, when a mutual society (including mutual insurance companies and building societies) demutualises:
- if you receive a cash payment on demutualisation, no taper relief is due;
- if you receive shares or securities on demutualisation, the taper clock starts with the date on which the shares are issued.
How are share options treated?
A share option is a right to acquire shares. You do not have to pay CGT when you exercise a share option and acquire shares. You may have to pay CGT if:
- you dispose of your option rather than exercising it, or
- you dispose of shares that you acquired when you exercised an option.
If you have disposed of your option, you work out the qualifying holding period by reference to the date on which the option was granted.
If you have disposed of shares that you acquired when you exercised an option you work out the qualifying holding period by reference to the date on which you exercised the option and acquired the shares.
What is the qualifying holding period for a gain that benefits from a holdover relief?
Sometimes a gain will be calculated on a disposal but not brought into charge immediately. Instead, it is held over until a later chargeable occasion.
Normally, you work out the taper relief up to the time of the disposal and use that to work out the tapered held over gain. You should use the taper rates that applied at the time of disposal, not those that apply when the gain is brought into charge. The period that the gain is held over until the chargeable occasion does not count for taper relief.
There is an exception to this rule. You may dispose of shares which have the benefit of deferral relief or income tax relief (or both) under the Enterprise Investment Scheme. Where a chargeable gain that arises on that disposal is deferred under the Scheme, taper relief applies on a cumulative basis.
The rules in this passage do not apply to Gifts Holdover Relief.
What is the qualifying holding period for assets I acquired from my husband or wife?
If you dispose of an asset that you acquired from your husband or wife, you work out the qualifying holding period by reference to the date on which your husband or wife originally acquired the asset. If your husband or wife originally acquired the asset before 17 March 1998, you may qualify for a bonus year (see When do I qualify for a bonus year?).
Example
Your husband acquired a non-business asset on 1 March 1998. He gave it to you on 31 March 1999. You sell it on 16 June 2001.
As your husband acquired the asset before 17 March 1998, you qualify for a bonus year.
As your husband acquired the asset before 6 April 1998, the qualifying holding period runs from that date. You and your husband held the asset for three years and 71 days from 6 April 1998, so there are three whole years in the qualifying holding period plus the bonus year = four years.
Therefore, 90% of your chargeable gain after losses remains chargeable.
See also What about assets I acquired from my husband or wife? in article 7 for how to determine when an asset acquired from your husband or wife is a business asset.
If you acquired shares from your husband or wife that he or she had acquired under Enterprise Management Incentives, your qualifying holding period begins on the date the shares were acquired by your husband or wife and not the date the options were granted.
Could I lose my taper relief?
In some circumstances, taper relief may be frozen or lost.
- If you take steps to insulate yourself against both upward and downward movements in the value of an asset.
- If before 17 April 2002 you disposed of shares in a close company (broadly, a company controlled by five or fewer participators) which had started to trade or which had started or increased the scale of a business of holding investments.
- If after 17 April 2002 you disposed of shares in a company which had been a close company and inactive for a time.
- If you own shares in a close company and value has been shifted into those shares.
What comes next?
To work out your taper relief you also need to know whether the asset has been a business asset or a non-business asset. The next article shows you how to find that out.
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