Back

Capital Gains Tax - Reliefs

Introduction

There are several reliefs available which can result in the reduction in the amount of capital gains tax having to be paid or in some cases not having to be paid at all. This briefing provides an overview of Private Residence Relief, Business Asset Disposal Relief and Gift Hold-over Relief.

Core considerations  

  • Private residence relief is available when an individual sells or disposes of their main residence. Partial relief is also available.

  • Business Asset Disposal Relief (BADR) is available on the disposal of business assets.

  • BADR reduces the rate of CGT to 10%.

  • Gift hold-over relief must be claimed. 

  • The base cost of the assets is rebased in the hands of the recipient when claiming Gift hold-over relief. Depending on the asset, an individual may be able to reduce any tax payable by claiming this relief.

Contents

Private Residence Relief

An individual may qualify for Private Residence Relief if they sell or dispose of their home. Married couples and civil partners can only count one property as their main home at any one time.

Private residence relief can be claimed if all the following apply:

  • the individual has one home and they have lived in it as their main home for all the time they have owned it; and
  • they have not let part of it out - this does not include having a lodger;
  • they have not used a part of their home exclusively for business purposes. Using a room as a temporary or occasional office does not count as exclusive business use;
  • the grounds, including all buildings, are less than 5,000 square metres (just over an acre) in total;
  • they did not buy it just to make a gain.

If the residence has been their main residence for part of their period of ownership, this relief can be claimed for that period of ownership, which can result in a reduction of CGT. The last 9 months of ownership will always be treated as exempt.
 

Business Asset Disposal ReliefS (BADR)

Before 6 April 2020, this was called Entrepreneurs Relief. This relief is intended to incentivise individuals to grow and invest in their businesses, representing a valuable source of CGT relief for higher and additional rate taxpayers. 

The relief is available to individuals disposing of their personal business or interest in a partnership, as well as directors and employees selling shares in the company (or group of companies) they work for.

BADR is available on disposals of business assets, reducing the rate of CGT on qualifying gains to 10% (compared to the current CGT standard rate of 20% for higher/additional rate taxpayers). The relief is subject to a £1 million lifetime limit on gains, with the current maximum potential tax saving under BADR being £100,000. The rate of 10% is applied after deducting any eligible losses and the annual exempt amount.

To be eligible to claim BADR, the following criteria must be met:

  • the company or business must be a trading business,
  • a sole trader or partnership must have been trading for at least two years before selling or business ceasing,
  • no less than 5% of the total shares, with shares held, and shares must have been held for at least two years.

To qualify for the relief, when selling all or part of a business, both of the following must apply for at least two years up to the date the business is sold:

  • They were a sole trader or business partner.
  • They owned the business for at least two years.

When selling shares or securities, to qualify, both of the following must apply for at least two years up to the date the shares are sold:

  • The individual is an employee or office holder of the company (or one in the same group).
  • The company’s main activities are in trading (rather than non-trading activities like investment) - or it is the holding company of a trading group.

For example - Business Asset Relief:

Geoffrey sold his business for a profit of £250,000 in June 2024. After deducting the Annual Exempt Amount of £3,000 this leaves a profit of £247,000 to be taxed. 

By being eligible for BAPR, he pays 10% on the profits = £24,700 (regardless of his personal Income Tax status).

If he did not qualify for BAPR, the gain of £247,000 would pay higher rate tax @20% = £49,400 (assuming his other income used up the basic rate band). And, if the business assets included a residential property, 24% CGT would be paid on the profit from the sale of that property.

 

Gift Hold-Over Relief

When chargeable assets are gifted, Gift Hold-over Relief allows the gain to be deferred until the new owner disposes of the asset. It can be used so that an immediate charge to CGT is avoided, and instead the recipient of the gift takes over the gain of the original owner. This reduces the base cost of the asset in the hands of the recipient. There are no limits on the amount of gain that can be held-over under these provisions. 

Gift Hold-over Relief is not automatically applied and must be claimed. It can be claimed for:

  • Gifts of business assets.
  • Gifts of unlisted shares, for example in trading companies.
  • Gifts of agricultural land.
  • Gifts which are chargeable transfers for Inheritance Tax purposes.
  • Certain types of gifts which are specifically exempt from Inheritance Tax.

For example - Gift Hold-over Relief

Kristina has a business asset that she acquired for £20,000. Five years later she gifts this asset to a friend, Jerry when it is worth £50,000, resulting in a chargeable gain of £30,000.

If Gift Hold-over Relief is claimed, Kristina does not have to pay CGT on the gain. On the future disposal, the cost used to calculate the gain is the market value at acquisition less the amount of the gain held over.

The market value was £50,000, however the gain held over was £30,000 and so the acquisition cost would be £20,000 in any future CGT calculation for Jerry.

Back