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Capital Gains Tax Changes – Autumn 2018 Budget

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Property Tax

The Autumn 2018 budget proposed significant changes to reliefs given on the sale of property that was previously occupied as a main residence. From April 2020 the government plans to restrict two essential parts of Principal Private Residence Relief (PPR) which could mean that additional tax may be due on the sale after this date.

The government is currently consulting on these changes, the outcome of which is due in the coming months.

Reduction in final period of deemed occupation

Under the current rules, the final 18 months of ownership are treated as a period of deemed occupation. Deemed occupation is a period of ownership where the owner is physically absent from the property but for PPR purposes is treated as living there. The effect of this is that any capital gain apportioned to the final 18 month time period is not chargeable to capital gains tax. However, under the budget reforms this period of deemed occupation is to be reduced from 18 months to 9 months.

This reduction in deemed occupation means that the sale of a property that you previously resided in could be subject to an increased tax charge if sold from April 2020 onwards. This may be particularly problematic for couples who are separating or divorcing.

Lettings relief restriction

A further aspect of PPR relief is “Lettings Relief” which is currently available to a property which has been the owner’s principal private residence at some point but which has been residentially let to a tenant during a period of the owner’s absence.

This relief can currently reduce a chargeable gain by up to £40,000 per owner (£80,000 per couple). However, from April 2020, lettings relief will only apply in circumstances where the owner of the property is in shared occupancy with a tenant.  Details of what qualifies as shared occupancy will be released in the forthcoming consultation by HMRC.

It is safe to say that it is never been more important to keep careful and complete records of periods of occupation and lettings of your property.

Entrepreneurs Relief

The other significant budget reform was made regarding the qualifying conditions for an Entrepreneurs’ Relief claim.

The first key change is that the qualifying holding period of the shares has now increased from one year to two for disposals made on or after 6th April 2019. This in the main will mean that shareholders will need to consider their position two years in advance of a disposal date to ensure that the beneficial relief can be claimed and any capital gains tax on the disposal will be chargeable wholly at 10% instead of the usual 20%.

The second change which came in to effect immediately after the budget on 29 October 2018 is that the definition of a personal company has been widened.

Prior to budget changes, a personal company was one in which a shareholder held at least 5% of both the share capital and voting rights in the company. This has now been widened to stipulate that the shareholder must also have both an entitlement to at least 5% of the profits available for distribution and an entitlement to at least 5% of the assets due on the winding up of the company.

Shareholdings that may be particularly affected by the revised legislation are those who fall into any of the following categories:

  • Alphabet shares
  • Growth shares
  • Shares in investment backed companies
  • Shareholdings diluted by new share issue

Due to the detrimental effect of the revised legislation on alphabet shareholders, lobbying by the tax profession led to the addition of an alternative test. The alternative test states that instead of having to meet the tests based on 5% of profits available for distribution and assets on winding up, the shareholder can instead look at their beneficial entitlement to proceeds on the disposal of the whole ordinary share capital. It is therefore crucial to ensure where alphabet shares are in issue that the relevant shareholders are entitled to 5% of any sales proceeds for the two years prior to the actual sale.

To summarise:

On the sale of shares in a company by an individual, the following qualifying conditions must be met throughout the 1 year up to the date of disposal for disposals before 6 April 2019 or throughout the 2 years up to the date of disposal for disposals on or after 6 April 2019:

  • the shareholder must be an officer or officer or employee (full or part time) of the company or, if the company is a member of a trading group, of one or more companies which are members of the trading group;
  • the shareholder must hold shares that represent at least 5% of the “ordinary share capital” of the company (by nominal value); and
  • by virtue of that holding exercise at least 5% of the voting rights in the company; and
  • meet either or both of the following conditions:
  • by virtue of that holding be beneficially entitled to at least 5% of the profits available for distribution to the “equity holders” of the company and, on a winding up, be beneficially entitled to at least 5% of the assets so available; OR
  • in the event of a disposal of the whole of the ordinary share capital of the company, be beneficially entitled to at least 5% of the proceeds.

 Allowances and tax rates

On a more positive note, for the 2019/20 tax year the annual exempt amount for CGT will increase to £12,000, the personal allowance to £12,500 and the higher rate threshold has also increased significantly to £50,000.

If you believe any of the above may affect you, please get in touch with a member of our team who will be happy to advise.