Plan ahead
for further capital gains tax changes
The immediate changes to the main capital gains tax (CGT) rates made in the Autumn Budget precluded any effective planning around them. However, changes announced for business asset disposal relief (BADR) and investors’ relief will not be enacted until the new financial year, meaning some planning is possible for business owners and investors.
Gains falling within a taxpayer’s basic rate tax band of £37,700 are now subject to the CGT rate of 18%, having been increased from 10%. A higher rate of 24% (previously 20%) applies to gains which fall above this basic-rate threshold.
The rate of CGT where gains qualify for BADR remains at 10% for the current tax year – until 5 April 2025. Relief is available against the first £1 million of qualifying gains realised during a taxpayer’s lifetime.
The qualifying conditions for BADR can be complex. For example, a company may not meet the trading condition if there are substantial non-trading activities. There is a 5% shareholding requirement where shares are being disposed of, and this condition can be problematic where share issues have diluted a shareholding to less than 5%.
Given the reduced tax saving and the complexity of the qualifying conditions, BADR is likely to be of less importance in the future.
Investors’ relief effectively extends BADR to long-term external investors in unlisted trading companies. Before the Autumn Budget, investors’ relief came with a separate lifetime limit of £10 million, but the limit has been reduced to £1 million for disposals made on or after 30 October 2024.
The rates of CGT on gains qualifying for investors’ relief are the same as those for BADR, so the current rate of 10% will increase to 14% for 2025/26, and then to 18% from 2026/27.
Despite the changes, business owners and investors will be relieved that BADR and investors’ relief have not been abolished altogether. There is a tax planning opportunity for anyone intending to make a qualifying disposal in the near future.
One potential issue could be the required holding period. For investors’ relief, shares must have been held for three years prior to their disposal.