5. Session 5

Private Residence Relief (PRR) Additional Aspects

• A residence qualifies for PRR only if located in a territory where the individual is a tax resident.
• If located in a different territory, the individual must meet the 90-day test (see Chapter 17 Section 20.1.3).
• No PRR if the property was purchased to resell for a gain.
• PRR is denied if there's a related claim to gift relief under section 260 TCGA 1992 (Session 6).
• If part of a private residence is used exclusively for business, PRR isn't available on the gain from that portion.

Rollover Relief Additional Aspects

• A UK tax resident can claim rollover relief if the conditions are met.
• HMRC won't deny relief if the person ceased to be a UK tax resident when acquiring new qualifying assets, as long as all other conditions are met.
• See session 10 for additional aspects of rollover relief for companies.

Gift/Holdover Relief Additional Aspects

• If the transferee becomes non-resident in the UK within six tax years following the gift year, the gift relief is chargeable on the transferee as a gain.
• Gift relief is only available if the transferee is a UK resident at the time of the gift.

Interaction with Section 165

• If an asset qualifies for Section 165, Section 260 has priority.
• Relief Mechanism: Deferral relief, always fully reducing the gain.
• Asset Type: All types of chargeable assets.
• Claims: Only the donor needs to claim, with the same deadline as for Section 165.
• Chargeable Lifetime Transfer: Most gifts into trust, even if no lifetime IHT arises, qualify for Section 260 gift relief.
• Where the gift is a Chargeable Lifetime Transfer for Inheritance Tax purposes (session 15 and Chapter 24), Section 260 gift relief applies.

Incorporation Relief - Part 1

Parts 5.2.1 – 5.2.2 – Competency Statement Reference

• 3.3 Common Reliefs from CGT: Determine and apply appropriate reliefs including, inter alia: Relief for the transfer of a business to a company. Applies level.

Incorporations Overview

• Incorporation triggers a disposal of all assets, including chargeable assets.
• The disposal is deemed to take place at market value on the date of incorporation.
• A capital gains tax liability can arise.

Incorporations Tax Impact

• Relief(s) may be available on incorporation of a sole trade/partnership to defer chargeable gains arising on any chargeable assets.
• Other tax issues also arise on incorporation.

Incorporations – CGT Deferral Reliefs

• Two possible CGT deferral reliefs may be available:
  1. Section 162 TCGA 1992 – incorporation relief
  2. Section 165 TCGA 1992 – gift/holdover relief (see part 5.2.2)

Incorporation Relief Conditions

• Automatically available when all conditions are met:
  1. Individual transfers the business to a company as a going concern.
  2. All assets (except cash which may be retained) are transferred.
  3. The consideration given by the company for the transfer of the trade is wholly or partly shares in the new company.

Incorporation Relief Calculation

• $Chargeable gains arising \times \frac{Value \space of \space share \space consideration}{Total \space consideration} = Incorporation \space relief$
• Gain will be chargeable immediately if any non-share consideration.

Incorporation Relief Steps

• STEP 1 - calculate the chargeable gains arising on incorporation
• STEP 2 – check if the conditions for incorporation relief are met
• STEP 3 – calculate incorporation relief and deduct from gains
• STEP 4 – the gains relieved are deferred i.e. deducted from the base cost of the shares in the new company
• Key point: full or partial relief depends on % of consideration in the form of shares

Incorporation Relief Proforma

• Total gain(s) computed in the normal way: X
• Less: incorporation relief: (X)
• Net gains: X
• Less: annual exemption: (X)
• Taxable gain – BADR*/10%/20%: X
• *BADR (Business Asset Disposal Relief) – but generally not on goodwill gains
• **Partial relief only due to non-share consideration

Incorporation Relief – Part 2

Incorporations – Business Asset Disposal Relief (“BADR”)

• If non-share consideration is received, a taxable gain may arise.
• This gain is subject to CGT in the usual way.
• Business Asset Disposal Relief may be available on the element of the taxable gain which is not goodwill resulting in CGT at 10%.

Incorporation Relief Question

• Sharon, a sole-trader, incorporates on 1 December 2024, transferring her business to a limited company for £50,000 cash and shares valued at £600,000. Capital gains arising on the transfer are £260,000. Calculate the capital gain after relief and the base cost of Sharon’s shares.

Incorporation Relief Solution

• Gain before incorporation relief: £260,000
• Less: incorporation relief (note 1): (£240,000)
• Gain after incorporation relief: £20,000
• Base cost of shares: Market value of shares £600,000
• Less: incorporation relief (£240,000) = £360,000

Incorporation Relief Solution

• $Gain \times \frac{Value \space of \space shares}{Total \space consideration} = Incorporation \space relief$
• $£260,000 \times \frac{£600,000}{£600,000 + £50,000} = £240,000$

Incorporation Relief Impact

• The base cost of the shares issued is market value but this is reduced by the deferred gain.
• This relief is inflexible – as all assets must be transferred (except cash), including properties and vehicles.

Incorporations – Gift Relief

• Gift relief may be claimed as an alternative to incorporation relief.
• Chargeable assets are transferred to the company at market value.
• Base cost of assets in the company is market value less the gift relief i.e. the deferred gain.
• More flexible than incorporation relief.
• Base cost of the shares will be low e.g. £1

Business Asset Disposal Relief - Part 1

Parts 5.3.1 – 5.3.2 – Competency Statement Reference

• 3.3 Common Reliefs from CGT: Determine and apply appropriate reliefs including, inter alia: Business Asset Disposal relief Applies level

Business Asset Disposal Relief (“BADR”)

• May be claimed where a qualifying business disposal (QBD) is made.
• The QBD must be either: A material disposal of business assets or An associated disposal

BADR Overview

• BADR provides for a 10% flat rate of CGT on QBDs within the individual’s lifetime limit.
• Each individual has a lifetime limit of £1 million.
• BADR can be claimed on an outright sale, a gift, or on certain capital distributions such as when a shareholder sells shares to the company.

BADR Proforma

• Gain computed in the normal way: X
• Less: annual exemption: (X)
• Taxable gain – BADR 10%: X

BADR Administration

• Must claim BADR before the 1st anniversary of filing date of tax year in which disposal took place
• Qualifying disposal in 2024/25 BADR must be claimed on or before 31 January 2027

BADR and Capital Losses

• BADR capital losses are netted off against BADR gains first.
• Excess BADR capital losses, losses on non-BADR disposals, capital losses brought forward and the annual exemption should then be applied in most tax efficient manner.
• Key point: gains qualifying for BADR use up any remaining basic rate band.

BADR Calculation Proforma

• Total gains:
• Gains qualifying for BADR: X* (Use BADR qualifying capital losses here first)
• Gains not qualifying for BADR: X** (Use non-BADR capital losses here first)
• Less: annual exemption: N/A (AE)*** (Use AE against higher taxed gains first)
• Taxable gain – BADR 10%: X**** (Deemed to set any available remaining basic rate band here first)
• Taxable gain – 10%/18%/20%/24%: X

BADR Material Disposals of Business Assets

1. Disposal of:
   • whole/part of sole trade business/share of partnership business, as a going concern; and
   • owned throughout the period of 2 years ending on the date disposal; and
   • assets must have been used in the sole trade business/partnership
2. Subsequent disposal of assets:
   • used in the sole trade business/partnership at time of cessation of trade; and
   • business owned throughout 2 years before cessation; and
   • date of cessation within 3 years of date of disposal of asset

BADR Material Disposal of Business Assets

3. Disposal of shares:
   • in individual’s personal trading company, as defined
   • shareholder was an employee/company officer
   • all these conditions are met ➢ throughout the 2 years ending on the date of disposal; or ➢ throughout the 2 years ending on date company ceases to be a trading company, and the disposal date of shares is within 3 years

Business Asset Disposal Relief - Part 2

BADR Personal Trading Company

An individual’s personal trading company is a company in which the individual holds:

*   at least 5% of the company’s ordinary shares; and
*   that holding also has an entitlement to at least:
    ✓5% of the voting rights in the company; and
    ✓5% of the company’s distributable profits; and
    ✓5% of the assets available on a winding up
*   Company must be either a trading company or the holding company of a trading group – broadly applying a 20% test to any investment activity

BADR Personal Trading Company Examples

1. Disposal of 2% interest in trading company Box Ltd, held the shares for 2 yrs and is an employee of company BADR is not available as the shareholding is < 5%.
2. Disposal of 6% interest in P Ltd, a property investment company, held shares 3 yrs and a director of company for 3 yrs BADR is not available as the company is not a trading company.

BADR Personal Trading Company Examples

3. Disposal of 7% interest in Sweeney Ltd, a trading company, held shares for 24 mths. Not a director or employee. BADR is not available as the individual is not a company officer or employee

4. Commenced trade on 1 Jan 2023, sold sole-trade business on 30 November 2024 – gain made on sale of goodwill.

   BADR is not available as must have owned the business for 2 years prior to disposal, the ownership period here is only 23 months

BADR Associated Disposals

3 conditions must be met:

1. The individual makes a material disposal of the whole/part of their interest in assets in a partnership/shares in a company; and
2. An associated disposal is made as part of their partial/full withdrawal from participation in the business of the partnership/company; and
3. The assets were in use in the business for the 2-year period ending with the earlier of:-
   • the date of the material disposal; or
   • the cessation of the business of the partnership/company

BADR Associated Disposal Example

Shane is a director of Shane Engineering Limited. He personally owns the factory premises from which the company operates its business. He sells the factory premises at the same time as he sold his shares in the company.

The sale of the factory premises may be treated as an associated disposal and so may qualify for BADR in addition to BADR also being potentially available on the shares.

BADR Associated Disposal Restrictions

BADR is restricted where the disposal is an associated disposal and the use of the asset in the business:-

• has only been for part of its ownership period;
• has only been partly used in the business; or
• the individual has only been involved in the business for part of the period of ownership of the asset; or
• rent has been charged by the individual for the use of the asset by the partnership/company

BADR Example

Rob sells 80% of the shares in Pipes Ltd, a trading company making a gain of £500,000. He held the shares for 3 years, was a director and made no previous capital disposals. At the same time, he sold the company’s factory which he owned personally making a gain of £250,000. Rob charged Pipes Ltd 75% of the full market rent for property usage.

BADR is available on the shares as this is Rob’s personal trading company and his full lifetime limit is available.

However: BADR is not available on 75% of the gain on the factory property under the associated disposal rules as Rob charged 75% of the full market rent. BADR is thus available on 25% i.e. £62,500 only of this gain.

BADR Question

JT sold his sole trade business during 2024/25. All the assets qualified for BADR and the chargeable gains arising totalled £300,000. JT also sold assets used in the same business making a capital loss of £50,000. JT has not previously sold any assets.

In 2024/25, he also sold 2 residential investment properties in Belfast. A gain of £35,900 arose on his Lisburn Road property. A capital loss of £15,000 arose on his University Road property. JT has a salary of £38,260 in 2024/25 and has capital losses brought forward of £8,000 from 2023/24. Calculate JT’s CGT liability for 2024/25.

BADR Solution

JT’s available basic rate band is £12,010*

JT’s taxable capital gains tax liability for 2024/25 is £27,376 – see next slides for calculation.

The gains qualifying for BADR use up the available remaining BRB of £12,010 in priority to gains not qualifying for BADR.

*Salary £38,260 – personal allowance £12,570 = £25,690. Thus, available basic rate band is £12,010 (£37,700 - £25,690)

BADR Solution

BADR Solution

Investors' Relief

Part 5.4 – Competency Statement Reference

• 3.3 Common Reliefs from CGT: Determine and apply appropriate reliefs including, inter alia: Investors’ relief Understands level

Investors’ Relief (“IR”) Overview

• IR is designed to provide a financial incentive to encourage individuals to invest in shares in unlisted trading companies as a passive investment
• IR provides a 10% rate of CGT to gains on the disposal of certain qualifying shares in unlisted trading companies
• IR provides a £10 million lifetime limit for qualifying gains

Investors’ Relief Conditions

In order to be qualifying shares, the shares must be:

• new shares issued by the company on or after 17 March 2016;
• held continually for a period of 3 years before disposal, commencing from 6 April 2016
• in an unlisted trading company; and

Investors’ Relief Claimant Conditions

• The claimant must be an individual, other than an employee or officer of the company
• Relief is denied where the individual is connected with officers or employees of the company
• However: a ‘relevant employee’ within two specific categories can claim the relief if all other conditions are met

Investors’ Relief Proforma

• Gain computed in the normal way: X
• Less: annual exemption: (X)
• Taxable gain – IR 10%: X

Investors’ Relief Question

Shane purchased 1,000 newly issued shares in an unlisted trading company in June 2017 at a cost of £5 each. He sold the shares in January 2025 for £50 each and has never owned any other assets. Shane is not connected with the company in any way. Calculate the CGT payable by Shane in 2024/25 on the disposal of the shares, after any available relief.

Investors’ Relief Solution

Shane meets the conditions for investors’ relief hence CGT arises as follows:-

• Proceeds (£50 x 1,000): 50,000
• Less: cost: (5,000)
• Gain: 45,000
• Less: annual exemption: (3,000)
• Taxable gain: £42,000
• CGT – 10% (IR): £4,200

Comparison of BADR and IR

Enterprise Investment Scheme and Seed Enterprise Investment Scheme capital gains reliefs – Part 1

Part 5.5.1 – 5.5.2 – Competency Statement Reference

• 3.6 Tax Advantaged Venture Capital Schemes: Determine and apply the appropriate reliefs available in relation to Enterprise Investment Scheme* and Seed Enterprise Investment Scheme** shares Applies level *EIS **SEIS

EIS and SEIS Capital Gains Reliefs

• This part focuses on the CGT reliefs available under the EIS and SEIS regimes
• Under each regime, conditions must be satisfied by:
  • The company must be a qualifying company
  • The investor must be a qualifying investor Covered in Session 1

EIS/SEIS Summary of Potential Investor Reliefs

An investment in new EIS/SEIS shares can provide for 3 types of tax reliefs for the investor:-

1. Upfront income tax relief (Session 1)
2. Upfront CGT relief:
   • Deferral of gains reinvested in new EIS shares: EIS CGT deferral relief;
   • Exemption of gains reinvested in new SEIS shares: SEIS CGT reinvestment/exemption relief
3. EIS/SEIS CGT disposal relief - provides an exemption from CGT on subsequent disposal of the shares after 3 years

EIS Deferral Relief

• Allows deferral of any type of gain, if an amount equal to the gain is invested in new qualifying EIS shares
• There is no requirement for the EIS shares to qualify for EIS income tax relief
• Taxpayer must be UK tax resident, can choose to restrict the amount of relief being claimed where this is beneficial and there is no cap on relief
• The deferred gain is frozen and crystallises later

EIS Deferral Relief Crystallisation

The frozen gain crystallises in the tax year of:

• Sale of the EIS shares
• If the investor becomes non-UK tax resident within 3 years of issue
• The shares cease to be eligible

SEIS Reinvestment Relief

Gains made on the disposal of any chargeable asset may obtain a 50% exemption from CGT on a maximum gain of £200,000 when reinvesting in qualifying SEIS shares

The individual must be UK tax resident and able to claim SEIS income tax relief to qualify for SEIS reinvestment relief

Maximum SEIS reinvestment relief = £100,000 The exempt element of the gain never becomes taxable

EIS Deferral Relief/SEIS Reinvestment Relief

Relief given is the lowest of:

• Amount subscribed for new shares; or
• The gain; or
• Amount specified in claim

Note: when claiming SEIS reinvestment relief, the taxpayer would generally seek to maximise this claim as this relief is an exemption and never becomes taxable

EIS Deferral Relief/SEIS Reinvestment Relief Proforma

• Gain computed in the normal way: X
• Less: EIS deferral relief/SEIS reinvestment relief: (X)
• Gain: X
• Less: annual exemption: (X)
• Taxable gain – BADR/10%/18%/20%/24%: X

EIS Deferral Relief/SEIS Reinvestment Relief Administration

• The subscription for the EIS/SEIS shares must take place in the period starting 12 months before or ending 36 months after the chargeable disposal on which relief is claimed
• Claims for relief must be made within 5 years from the tax filing deadline of the tax year in which the EIS/SEIS shares were issued
• Qualifying EIS/SEIS investment in 2024/25 EIS deferral relief/SEIS reinvestment relief must be claimed on or before 31 January 2031

Part 5.5.2: Enterprise Investment Scheme and Seed Enterprise Investment Scheme capital gains reliefs – Part 2

EIS Deferral Relief Question

Madge sold an asset during August 2024 for £350,000. She acquired it in 2005 for £100,000. The asset was a non-business asset. Calculate the investment Madge should make in EIS company shares to ensure no part of the gain remains in charge for 2024/25. Assume Madge made no other disposals in 2024/25, that both she and the company meet the conditions for the EIS and that Madge has a capital loss of £4,000 in 2024/25.

EIS Deferral Relief Solution

• Proceeds: 350,000
• Less: base cost: (100,000)
• 250,000
• Less: EIS deferral relief (balancing figure*): (?)
• CY capital loss: (4,000)
• 3,000
• Annual exemption: (3,000)
• Target gain: £Nil
• *Recommended investment is £?

EIS Deferral Relief Solution

• Proceeds: 350,000
• Less: base cost: (100,000)
• 250,000
• Less: EIS deferral relief: (243,000)
• CY capital loss: (4,000)
• Annual exemption: (3,000)
• Target gain: £Nil
• *Recommended investment is £243,000

SEIS Exemption Relief Example

An individual incurs a capital gain of £200,000 in 2024/25 and invests £20,000 in new SEIS shares which qualify for income tax relief which is claimed in 2024/25. The conditions for the SEIS are met. £10,000 of the capital gain is exempt in 2024/25. £190,000 remains taxable.

EIS/SEIS Disposal Relief

If the EIS/SEIS shares are disposed of, any gain on the sale is exempt if:-

• The EIS/SEIS shares were held for 3 years from date of issue; and

However: the capital loss is restricted by the amount of income tax relief given and not withdrawn

A loss on disposal of EIS/SEIS shares is always an allowable capital loss Income tax relief was obtained

Venture Capital Scheme Capital Gains Relief and Session 5 Wrap-Up

Part 5.6 – Competency Statement Reference

• 1.3 Understand and apply the reliefs available to investors under….Venture Capital Trusts Applies level

Venture Capital Trust Scheme (“VCT”) Capital Gains Relief

• This part focuses on the CGT relief available under the VCT scheme
• Conditions must be satisfied by:-
  • The VCT investor company – in order to be a qualifying company
  • The VCT investee company – in order to be qualifying
  • See Session 1

VCT Capital Gains Relief

• Investors in VCT shares are exempt from CGT on any gains made on the disposal of the VCT shares within the permitted £200,000 maximum investment
• Capital losses on VCT share disposals within the permitted £200,000 maximum are not allowable losses

Session 5 – Recap and Key Takeaways

• The CGT business reliefs are a key part of the CAP2 course – there are differences between the reliefs, when they apply, and different rules for their interaction
• Make use of the CGT business reliefs additional resources documents and always set out the full conditions
• Reliefs are a critical skill for CGT and are regularly examined
• Check the full conditions carefully to the relevant circumstances and consider if more than one relief applies

Session 5 – Recap and Key Takeaways

• Recap on private residence and lettings relief, rollover relief and gift relief – see Session 0 CGT recap and update session CAP1 CGT reliefs
• Incorporation relief should always be checked first as relief is automatic when conditions are met
• If there is any non-share consideration, only partial IR will be available.

Session 5 – Recap and Key Takeaways

• Investors’ relief may be available for (generally) passive share investments £10 million lifetime limit and 10% rate of CGT
• The EIS and SEIS both contain two potential CGT reliefs – one potentially available upfront and one when the relevant shares are sold
• Venture capital trust scheme shares are are exempt from CGT on any gains made on their disposal of the VCT shares within the permitted £200,000 maximum investment

Session 5 – Follow Up

• Review Chapter 19 and Chapter 20 (excluding sections 20.1.1, 20.1.2, 20.2.1, 20.3.1, 20.8 and 20.9), and slides and notes from the session
• Complete knowledge check questions
• Download and review additional resources
• Complete review questions in text and session-specific questions

Summary of Main CGT Business Reliefs

• Sole traders/ partners selling all or part of their business
• Directors or employees who have at least 5% in a trading company

1. A disposal of an asset “associated” with a material disposal (usually an asset held personally, like a building, which is used by the company in which they hold shares). | 1. Section 165 TCGA 1992 Business assets:

• unquoted trading company shares (any % of shareholding)
• shares in personal trading company (shares in quoted companies only qualify if have at least 5%)
• asset used in a business (e.g. land, buildings, goodwill (pre April 2002), plant & machinery)

Section 260 TCGA 1992: Gift of ANY asset where gift is immediately chargeable to IHT as a Chargeable Lifetime Transfer (basically a gift into a trust) | Assets must be used for a trade carried on by the trader (can include assets owned personally and used by a company in which he has 5% shares)

The asset must be a qualifying asset:

• Freehold land or buildings;
• goodwill
• Fixed plant & machinery
• Ships, aircraft and hovercraft
• Milk, potato & fish quotas
• Certain EU quotas

Old & new asset don’t need to be same type of asset. | Shares in unlisted trading companies held for at least three years starting on or after 6 April 2016. No minimum shareholding. |
| Type of asset excluded | No chargeable asset types are excluded; if conditions are met relief is automatically available | 1. A single asset used in the business (unless made when the business ceases to trade and asset is sold within 3 years of business ceasing)

2. Shares in a non-trading company (e.g. property investment co)
3. Goodwill/know how disposed of directly/indirectly to a related close company (with some exclusions) e.g. on incorporation. | 1. Non-business assets (e.g. property held for investment purposes gifted/private residence) unless gifted into a trust (in which case relief under s260 will apply)
4. Shares in quoted company where don’t have 5%. | Non-business assets or business assets not in the “qualifying assets” categories. | As above – only applies to shares in unlisted trading companies |
   | Restrictions / areas to watch out for in exam | Incorporation relief is restricted if any non-share consideration is received e.g. cash/loan account/loans notes. Can claim for incorporation relief to be disapplied if gains are small and covered by annual exemption or capital losses or BADR is being claimed (generally not available on goodwill/know how gains). | 1. Lifetime limit: £1million
5. Must have owned business (in case of sole traders/partners) or shares for at least two years before the disposal
6. Need at least 5% of shares, voting rights etc