Chapt.22 CGT reliefs 

The main reliefs available: 

1. Damaged or destroyed assets 

2. Replacement of business assets 

3. Gift of business assets 

4. Transfer of a business to a ltd co. 

5. Disposal of a business (“entrepreneurs’ life”) 

6. Reinvestment in EIS shares 

7. Loans to trade 

A Gift of business Assets 

Comprises a chargeable disposal, whether or not the asset is used in business. However, subject to certain conditions, a claim may be made for the gain arising in a gift of business assets to be held over until the transfer or disposal of the assets concerned. If such a claim is made, the transferrer’s gain on the disposal is reduced to zero and the transferee’s actual acquisition cost is reduced by the amount of the gain that would have been chargeable on the transferrer if the gift had not been made. The conditions that must be satisfied are as follows: 

1. Both the transferrer and the transforee must account for the gain arising from a gift to be held-over. This election must be made within four years of the end of the tax year in which the gift is made.e 

2. The gifted assets may consist of either: 

1. Assets used in a trade, profession or vocation carried on by the transferor or if the transferee’s personal co. (a co. In which at least 5% of the voting rights are held by the transferor or 

2. Shares or securities of a trading co. Which is unlisted or that the transferor’s personal co. (so long as the transferee is not a company) 

If the gift is of shares, vs individual business assets, the gains arising on the disposal is apportioned between the amount which relates to chargeable business assets and by the co. On the day of the gift and the amount which relates to other chargeable assets (e.g. investments) 

Only the part of the gain relating to chargeable business assets is eligible for hold-over relief. 

Sale for less than market value 

Gift relief is also available if a business asset is sold for less than market value (typically to a connected person).  

But if the actual consideration received by the transferor exceeds the original cost of the asset (so that part of the gain has been realised) the amount of the gains which may be held over is reduced by the excess of the actual consideration on the asset. 

Entrepreneurs’ relief (10%) 

If an ER claim is made in respect of a qualifying disposal, average losses arising in relation to that disposal must first be deducted from the gains arising in relation to the disposal. The resulting amount is then treated as a chargeable gain. This gain is subject to CGT at the rate of 10% rather than at the standard rate (18%) or the higher rate (28%). 

The taxpayer may also have capital losses in the year arising from non-ER disposals or capital losses brought on from previous years. In these circumstances, 

1. Non-ER capital losses, capital losses brought forward and the annual exemption may be set against non-ER gains (which are taxable at 18% and 28%) and only then against gains which qualify for ER. 

2. The unused part of the taxpayer’s rate band (if any) is reduced by the amount of ER gains arising in the year. Non-ER gains are then taxed at 18% to the extent that they do not exceed any remaining part of the basis rate band and at 28% otherwise. 

ER was 

 subject to a lifetime limit of £10mn correct as of April 2011. 

Entrepreneurs’ Relief (ER) was renamed Business Asset Disposal Relief (BADR) by Finance Act 2020.  

BADR is a Capital Gains Tax (CGT) relief that reduces the rate of tax paid on the disposal of qualifying business assets where the disposal proceeds are high enough to take you into the higher tax bands. 

It can apply to disposals of: 

• A sole trade and its assets. 

• Partnership interests and assets. 

• Shares in your own company. 

• Joint venture interests. 

• Business assets held by a trust. 

When is BADR available? 

• It is available to CGT disposals made by individuals and trustees. It does not apply to disposals by companies. 

• It applies to qualifying disposals of business assets. It does not apply to the disposal of investment or non-business assets. 

The effect of BADR 

• It reduces the rate of CGT payable on qualifying disposals to 10%.  

• An individual may claim BADR up to a lifetime limit of qualifying capital gains. This limit is currently £1 million. 

Restrictions 

How BADR works  

Chargeable gains covered by BADR are taxed at a tax rate of 10%. 

The amount of BADR given depends on the amount of the individual’s BADR lifetime limit after taking previous disposals into account at the date of the disposal. 

The lifetime limit is as follows: 

• £1 million from 11 March 2020. 

• £10 million from 6 April 2011  to 10 March 2020. 

• £5 million from 23 June 2010 to 5 April 2011. 

• £2 million from 6 April 2010 to 22 June 2010. 

• £1 million for 2008-09 and 2009-10. 

Business Asset Disposal Relief (Entrepreneurs’ Relief): At a glance – www.rossmartin.co.uk¹

Gains in excess of the lifetime limit will be charged at the CGT rate applicable for that period. 

In order for this relief to be available, the individual must dispose of either: 

1. All or part of a business (including a share in a partnership) which the individual has accrued throughout the period of one year ending on the date of the disposal. 

2. Assets owned by a business at the time at which it ceases trading, as long as the business was owned by the individual (or by a partnership in which the individual was a member) throughout the year ending on the date of cessation and the asses are disposed of within 3 years of that date, or 

3. Shares or securities in a trading co. Which, throughout the period of one year ending on the date of the disposal, has been the individual’s personal co. And of which the individual has been an officer or employee. 

It is important to realise that the disposal must be either of a whole business or a significant part of this business. Note the following point: 

Destroyed Assets 

Usually result in a CGT computation in which disposal value is equal to the amount of any insurance money or other compensation received. However, if all the money received is spent (within 12 months) on the purchase of a replacement asset, the taxpayer may claim that the disposal of the original asset should give rise to neither a gain or loss. The cost of the replacement asset is then reduced by the gain which would otherwise have been made chargeable on the disposal of the original asset if the claim had not been made. 

If only part of the money received is spent on a replacement asset, the taxpayer may claim that the chargeable gain on the disposal of the original asset should be restricted to the amount of money retained (so long as this is less than the gain). The cost of the replacement asset is then reduced by the balance of the gain that would have been chargeable if the claim had not been made. 

Damaged Assets 

If an asset has been damaged and insurance money or other compensation is received as a consequence, the situation is usually treated as a part-disposal. The value of the part disposal of A is the amount of money received and the value of the part remaining B is the value of an asset on the value of the asset on the date that the money was received. 

Any money spent on restoration is treated as enhancement of expectation.  

However, in certain circumstances, the taxpayer may elect that the situation should not be treated as a part disposal and that the amount of money received should instead be deducted from the allowable expenditure relating to the assset. 

This has the effect of increasing the gain margin in a subsequent disposal nad is v. similar to the CGT treatment of small capital distributions (see Chapt.20) 

The circumstances in which a partial disposal may be avoided are: 

1. All of the money received is applied to restoring the asset. 

2. The asset is not a wasting asset and all the money received is applied to restoring the asset except for an amount which is small in comparison received and which is not reasonably required for restoration purpose; or 

3. The asset is not a wasting asset and the amount of money received is small in comparison with the asset. 

A sum is regarded as “small” f it does not exceed £3,000 or 5%of the amount with which it is being compared, whichever is the higher. 

A part disposal calculation is receivable if only part of the money received is spent on restoring the asset and whether either of the “small” tests is satisfied. However, the taxpayer may elect that the calculation should relate only to the amount which is received but not spent on restoration. If this election is made, the remainder of the money received is deducted from the allowable expenditure relating to the asset. 

Business Asset Disposal Relief (Entrepreneurs’ Relief): At a glance – www.rossmartin.co.uk