A round-up of developments in capital taxes for 2023 including some topical Capital Gains Tax (CGT) and Inheritance Tax (IHT) cases.
A guide for subscribers.
Capital Gains Tax: What's new?
Annual Exempt Amount
Finance Act 2023 provides that from 6 April 2023:
- The Capital Gains Tax Annual Exempt Amount is reduced from £12,300 to £6,000.
- This will reduce the amount for trusts to £3,000, from £6,150.
- The proceeds reporting limit for CGT is now fixed at £50,000.
From April 2024:
- There will be a further, permanent reduction for individuals and personal representatives to £3,000.
- The amount for trusts will correspondingly be permanently reduced to £1,500.
Assessment time limits: Completion of unconditional contracts
From April 2023:
- Finance (No.2) Act 2023 closes an avoidance loophole where an asset is disposed of under an unconditional contract and more than four years pass before the asset is conveyed or transferred.
- The changes apply in relation to contracts entered into on or after 1 April 2023 for Corporation Tax and 6 April 2023 for Capital Gains Tax.
- Where the rules apply, the assessment time limit operates by reference to the tax year or accounting period in which the asset is conveyed or transferred rather than the tax year or period in which the contract for the disposal was made.
Share exchanges involving non-UK incorporated close companies
From 17 November 2022:
- Finance (No.2) Act 2023 introduced a measure to prevent UK resident non-domiciled individuals from avoiding CGT through the use of the Remittance Basis.
- Shares & securities acquired by a participator in a non-UK close company in exchange for shares & securities in a UK close company are deemed to be located in the UK for the purpose of the CGT rules.
- This means that if a UK resident non-domiciled individual makes a chargeable gain on disposing of shares or securities in a non-UK company, they will pay any CGT due on the arising basis and the remittance basis cannot apply.
See CGT: Share for share exchanges
Transfer of assets between spouses and civil partners in the process of separating
From 6 April 2023:
- Under Finance (No.2) Act 2023, separating spouses or civil partners are given up to three years after the tax year in which they cease to live together to make no gain/no loss transfers.
- No gain/no loss treatment will also apply to assets transferred between separating spouses or civil partners as part of a formal divorce agreement, regardless of the timing of the transfer.
- A spouse or civil partner who moves out of the former matrimonial home, but retains an interest in it, will be given an option to claim Private Residence Relief (PRR) for the period after moving out when it is sold to a third party.
- Individuals who have transferred their interest in the former matrimonial home to their ex-spouse or civil partner and are entitled to receive a percentage of the proceeds when that home is sold to a third party will be able to apply the same proportion of PRR to those proceeds when received, as applied when they transferred their original interest in the home to their ex-spouse or civil partner.
See Divorce & Separation: Toolkit and PRR: Private Residence Relief
LLPs and Scottish partnerships disposing of joint interests in land
From 6 April 2023:
- Rollover Relief for exchanges of joint interests in land will be available for Limited Liability Partnerships (LLPs) and Scottish Partnerships as it would be if the land was held by the individual partners.
See Rollover Relief: Exchanges of joint interests in land
Taxation of Lump Sum Exit Scheme payments to farmers
Backdated from 6 April 2022:
- Finance (No.2) Act 2023 provides that payments received by farmers under the Lump Sum Exit Scheme (LSES) which relate to an eligible claim are neither receipts of a trade nor miscellaneous income.
- This will allow the payments to instead be treated as the proceeds from the disposal of a chargeable asset, as is currently the case when Basic Payment Scheme entitlements are disposed of.
- In the case of a company receiving LSES payments, the payments will be treated as proceeds from the disposal of an intangible asset.
Social Investment Tax Relief (SITR)
- Social Investment Tax Relief (SITR) was an Income Tax and Capital Gains Tax (CGT) investment scheme relief whereby gains could be deferred when they were invested into qualifying social enterprises.
- The relief ended on 5 April 2023 meaning that new investments on or after 6 April 2023 will not qualify for relief.
See Social Investment Tax Relief
Cryptoassets reporting
From 6 April 2024:
- Changes to the Self Assessment tax return forms SA108 (Capital gains summary page) and SA905 (Trust and estate capital gains page) require amounts in respect of cryptoassets to be separately identified.
- The changes will be introduced on the forms for tax year 2024-25.
Capital Gains Tax (CGT) rates
- No changes to CGT rates for 2023-24. These remain at 10% (basic rate taxpayers) or 20% (higher rate taxpayers) and at 18% or 28% for gains on the disposal of residential property.
Topical CGT cases
Private Residence Relief (PRR)
A gain made on the disposal of an individual’s only or main private residence is exempt from Capital Gains Tax under Private Residence Relief.
In order to claim PRR certain conditions must be met:
- The seller must own an interest in the property with full legal or beneficial title.
- The property can include a permitted area of 0.5 of a hectare (1.25 acres) of gardens and grounds. A residence includes the main building and other buildings within its curtilage on the basis that together they are occupied for the purpose of the main residence.
- The property has to have been occupied as a private residence.
- It must have at some stage been the individual's only or main residence.
In HMRC v Gerald and Sarah Lee [2023] UKUT 242, the Upper Tribunal found that Private Residence Relief applied to the entire gain on a main residence built on the site of a previously demolished property. The dwelling house existed for a quarter of the time that the land had been owned, but the period of ownership test related to the house only.
Business Asset Disposal Relief (BADR) (formerly Entrepreneurs’ Relief)
BADR is a Capital Gains Tax (CGT) relief that is available on the disposal of business assets, including a disposal of a qualifying shareholding in a trading company or trading group by an officer or employee where:
- For two years prior to the disposal, (one year up to April 2019), the individual owns:
- At least 5% of the company’s ordinary share capital and
- At least 5% of voting rights by virtue of that shareholding and
- Is entitled to 5% of the distributable profits available to equity holders and
- Is entitled to 5% of the rights to assets (for equity holders) in a winding up or
- Has an entitlement to at least 5% of the sales proceeds on the disposal of the ordinary share capital of the company.
In Olivia Wilkinson and others v HMRC [2023] TC 08887, the First Tier Tribunal decided that HMRC was not able to deny Capital Gains Tax (CGT) relief on a share-for-share exchange that subsequently allowed the daughters of a company's owner to claim Entrepreneurs' Relief after a take-over. The CGT planning exercise was not one of the main purposes, nor the main purpose, of the deal.
Deductible expenditure
Under s.38 TCGA 1992, costs incurred are allowable as deductions from the consideration received when computing the gain or loss on the disposal of the asset so long as it is wholly and exclusively relating to:
- The acquisition or creation of the asset.
- The incidental costs of the acquisition.
- The enhancement of the asset.
- Establishing, preserving or defending title to or rights over the asset.
- The incidental costs of disposal.
- With exclusion for expenses that are Allowable for Income Tax.
In John and Janet Beesley v HMRC [2023] TC08871, the First Tier Tribunal found that a tax agent had mistakenly claimed a deduction for Capital Gains Tax in respect of payments made to redeem a mortgage and made under a personal guarantee on the disposal of a property and that no Entrepreneurs’ Relief was due either as there was no evidence to support the claim.
Negligible value claim
If the value of an asset has become negligible a taxpayer may make a negligible value claim under section 24 TCGA 1992 and claim a loss on the asset.
- The result is that the asset is deemed to have been sold and immediately reacquired at its negligible value.
- This creates a capital loss, which, under normal CGT rules, would only otherwise arise on an actual disposal of an asset.
- A negligible value claim is only possible in situations where such a disposal is not possible because the asset is effectively worthless and no one would buy it.
In Robert Williams v HMRC [2023] TC08820, the First Tier Tribunal found that it had no jurisdiction to consider HMRC’s refusal of a negligible value claim that was not in the form required by HMRC.
Income from Employment-Related Securities or capital gains?
An RSU is quite similar in nature to a share option. The receipt of securities or the exercise of an option does not result in a Capital Gains Tax charge.
In Louis Daniel Moore v HMRC [2023] TC8806, the First Tax Tribunal dismissed a claim that an award of Restricted Stock Units (RSUs) was received as consideration for the disposal of shares in a takeover and was therefore subject to capital gains tax. The evidence revealed that they were no more than an incentive offered to retain senior employees of the business and as such they were employment-related securities options.
Inheritance Tax: What’s new?
Geographical scope of Agricultural Property relief (APR) and Woodlands Relief
From 6 April 2023:
- The geographical scope of Agricultural Property Relief (APR) and Woodlands Relief, for IHT purposes, are restricted to property in the UK.
- Property located in the European Economic Area (EEA), the Channel Islands, and the Isle of Man is excluded from relief.
See IHT Agricultural Property Relief and Woodlands: Overview
Taxation of ecosystem service markets and extension of APR consultation
- In March 2023 a consultation was opened on the Taxation of environmental land management and ecosystem service markets and the potential expansion of Agricultural Property Relief (APR). It closed in June 2023.
- It considers the tax opportunities from phasing out subsidies for land ownership and tenure and paying farmers and land managers to provide environmental goods and services alongside food production.
- Responses to the consultation have not yet been published.
See Taxation of ecosystem service markets and extension of APR consultation
Inheritance Tax (IHT) Rates & Allowances
Main rates & allowances
- There are no changes to the IHT nil-rate band which remains at £325,000, or the rate of IHT which remains 20% for chargeable lifetime transfers and 40% on death.
- The nil rate band is frozen until April 2028.
Main Residence Nil-Rate Band (RNRB)
From 6 April 2023
- The RNRB remains at £175,000.
- The RNRB effectively gives a married couple up to £1m of ‘nil rate bands’ to use before IHT applies.
- It is 'tapered' if the total estate exceeds £2 million.
- It is transferable to the surviving spouse if unused.
- It has priority over the nil rate band but only applies where a property is passed solely to lineal descendants.
See IHT: Residence Nil Rate Band
Spotlight on: IHT reliefs
Business Property Relief (BPR)
- Business Property Relief (BPR) provides relief from Inheritance Tax (IHT) on the transfer of relevant business assets at a rate of 50% or 100%.
- Property must generally be held for at least two years.
- The business or company in respect of shares, must be carried on commercially with a view to a profit and must not be subject to a contract for sale or winding up.
- There is no BPR if the business or company is one of 'wholly or mainly' in dealing in securities, stocks or shares, land or buildings or in the making or holding of investments.
- In order for a Furnished Holiday Let (FHL) to qualify as relevant business property for BPR:
- There must be a business carried on.
- It must be carried on for a gain.
- It must not be a business consisting wholly or mainly of holding investments.
- In respect of sole traders, BPR is given in respect of a business only and not for separate assets. An asset has to form part of the business to qualify for relief.
- 100% relief is given for an interest in a partnership, compared to 50% for property lent to or used by a partnership.
- There is no BPR given in respect of loans made to a company. This includes a credit balance on a directors' loan account.
- Property owned by a shareholder and used by the company can only qualify for 50% BPR. The shareholder must control (or have controlled) the company.
See IHT Business Property Relief
Agricultural Property Relief (APR)
APR is given on the agricultural value of agricultural property which has been:
- Occupied by the transferor for the purposes of agriculture for two years ending with the date of the transfer.
- Owned by the transferor for seven years ending with the date of transfer and occupied throughout by them or another for the purposes of agriculture.
APR is given at one of two different rates: 100% or 50%.
100% relief is given if:
- The owner has vacant possession of the property/a right to vacant possession within 12 months.
- The land has been let since before 10 March 1981 and the owner would then have qualified for 'working farmer relief' and at no point since has there been a right to vacant possession.
- The land is let on a tenancy which started on or after 1st September 1995.
- By concession (ESC F17): where land is let and carries a right to vacant possession in 24 months or, in practice, the market value of the property is broadly the same as its vacant possession value.
50% relief is given if:
The above conditions are not satisfied, so where:
- Vacant possession is not obtainable.
- The land has been let since before 10 March 1981 and the owner did not at that stage qualify for the old working farmer relief.
- The land is let on a tenancy which started before 1st September 1995 and there was no qualifying re-grant of the tenancy.
- The concession ESC F17 is not met.
APR can also be available for controlling shareholdings in unquoted companies which have assets that are agricultural property, to the extent that the value of the shares is attributable to the agricultural value of that agricultural property.
- At 100% if the above conditions around the occupation of the property and vacant possession are met for the agricultural property held by the company, otherwise at 50%.
- The transferor must have held their shares throughout the two or seven-year period in which the company met the ownership/occupation conditions above.
See IHT Agricultural Property Relief
Topical IHT case round-up
Domicile and IHT
UK-domiciled and deemed-domiciled individuals are subject to Inheritance Tax on all of their assets, subject to any overriding clause in a Double Tax Treaty.
- Non-UK domiciled individuals are only subject to IHT on UK-sited assets.
- There are special rules for returning non-doms and non-doms owning UK residential property through offshore companies and trusts.
In Ameet Shah (As Executor of the Estate of Anantrai Maneklal Shah deceased) v HMRC [2023] TC08442, the First Tier Tribunal found that the deceased had acquired a domicile of choice in England before his death. His estate could offer no evidence to prove that he planned to move back to India.
Trust Interest In Possession (IIP) and IHT
An IIP is defined as ‘a present right to present enjoyment' of the trust property. As such an IIP may grant a right to the enjoyment of assets such as the right to live in a property as well as the right to income.
In general, where there is an IIP or life interest, a single beneficiary has an immediate right to the income of the trust to the exclusion of all others.
- The trustees have no discretion in dealing with the income.
- A person with an IIP is referred to as a life tenant.
- Where a life interest has been created under a will, the value of the trust capital will form part of the life tenant's estate on their own death.
- Life interests are often created under a will, for example where a spouse wishes to ensure that the surviving spouse has a home, and perhaps an income during their lifetime, without leaving assets to them outright.
In Nicholas John Hall and Christopher Valentine Lopez as Trustees of the Carolina Raboni Estate v HMRC [2022] TC08691 , the First Tier Tribunal agreed that there was no Interest In Possession (IIP) in a house where the estate assets, apart from the house, were insufficient to pay the Inheritance Tax (IHT).
Links to relevant CPD webinars
CPD: Purchase of Own Shares (POS)
CPD: Non-Resident CGT: UK Property
CPD: CGT Reporting and payment deadlines
CPD: IHT: Transferable Nil Rate Band
CPD: Agricultural Property Relief
CPD: IHT Business Property Relief
Links to previous updates
