Capital gains tax for individuals on the disposal of shares in the UK

Out-Law Guide | 06 Jan 2020 | 5:34 pm | 6 min. read

Capital gains tax (CGT) is a tax payable by individuals on gains they make on the disposal of assets. An asset is any form of property, whether situated in the UK or overseas, and includes shares.

Capital gains tax (CGT) is a tax payable by individuals on gains they make on the disposal of assets. An asset is any form of property, whether situated in the UK or overseas, and includes shares.

The 'gain' on which CGT is charged

CGT is charged on the gain made from an asset. This gain is calculated by deducting the acquisition cost of that asset, together with any costs associated with the acquisition or disposal such as stamp duty or legal fees, from the proceeds of the sale. So, for example, if an individual bought some shares for £100 and sold them for £1,000, with no other incidental costs of acquisition or disposal, the gain would be £900.

There are special rules that apply to gifts or transactions between connected parties which can deem an asset to have been transferred for its market value for the purpose of CGT. In the case of some gifts of unquoted shares in a trading company or the holding company of a trading group, if conditions are satisfied, holdover relief may be available to defer the resulting gain until the recipient disposes of the shares.

Every individual has an annual tax free allowance. This means that there is no CGT to pay in any tax year if an individual does not exceed this annual exempt amount. To the extent that an individual exceeds their annual exempt amount, CGT is charged on the amount of the excess. The annual exempt amount for the 2019-2020 tax year is £12,000. Most trustees have an annual exempt amount of half the amount that applies for individuals.

Rate of CGT

The rate of CGT depends on the amount of an individual's total taxable income and gains from all sources.

CGT is payable at a rate of 20% for higher and additional rate taxpayers and 10% for others, unless entrepreneurs' relief or investors' relief is available (which will reduce the rate to 10%). When working out whether the lower 10% tax rate is available, any capital gains are added to income. If the higher rate threshold for income tax is then exceeded, 20% CGT will be paid on the gains to the extent that the threshold is exceeded. This means that an individual who pays income tax at the basic rate could pay 20% CGT, if large gains were made in a particular tax year.

CGT is payable at the higher rates of 18% and 28% for residential property not qualifying for the private residence exemption and on 'carried interest'. 

Entrepreneurs' relief

Entrepreneurs' relief reduces the amount of CGT to 10% on a disposal by an individual of a business, assets of a business or shares in a company if certain conditions are met.

There is a maximum lifetime limit of £10 million of gains that can be reduced by entrepreneurs' relief.

In order for the disposal of shares in a company to be eligible for entrepreneurs' relief, certain conditions must be met. Throughout the period of two years ending with the date of disposal of the shares:

  • the individual must have been an employee or officeholder in the company or any company within the group;
  • the company must be the indifidual's personal company; and
  • the company must have been a trading company, or the holding company of a trading group. This means that any activities of a non-trading nature, such as holding investments, must not be substantial – understood to mean 20% of the company's whole activities.

For a company to be an individual's personal company they must own at least 5% of the ordinary share capital and by virtue of that holding the individual must be able to exercise at least 5% of the company's voting rights. In addition either:

  • the individual must be beneficially entitled to at least 5% of the profits available for distribution to equity holders and to at least 5% of assets available for distribution to equity holders on a winding up; and/or
  • in the event of a disposal of the whole of the ordinary share capital of the company, the individual would be beneficially entitled to at least 5% of the proceeds.

These conditions, in particular the 5% personal company test, are not always easy to satisfy and so it is important to consider whether all the conditions are met for the required length of time.

Entrepreneurs' relief is not available automatically, and needs to be claimed on or before the first anniversary of the 31 January following the tax year in which the disposal is made.

The conditions must be satisfied right up until the disposal of the shares. Particular care needs to be taken to ensure that the 5% shareholding is not lost before the disposal of the shares, by a dilution of the individual's shareholding, such as on the exercise by others of share options. An individual can effectively 'bank' entrepreneurs' relief on gains that have arisen up to the date when an investment by an external investor on or after 6 April 2019 causes the individual's shareholding to fall below 5%.

If when the individual sells his shares, some of the consideration is paid by way of an earn out, careful consideration needs to be given to structuring the transaction in order to maximise the amount of entrepreneurs' relief available.

Investors' relief

Investors’ relief was introduced in 2016 and applies to individuals who invest in shares of unquoted trading companies, without being involved in the management or operation of the business.

Like entrepreneurs' relief, if conditions are satisfied, it reduces the amount of CGT to 10% and there is a separate lifetime limit of £10 million of gains that can qualify.

Detailed conditions must be satisfied. The main conditions are:

  • shares are acquired on or after 17 March 2016
  • they are ordinary shares in an unquoted trading company or the holding company of a trading group
  • subject to limited  exceptions, the investor must, at no time during the period for which the shares are held, be an officer or employee of the company itself or of any other company connected to the investee company.  This restriction extends to any person connected with the investor, such as a family member

For the relief to be available, the investor must hold the shares continuously for a three-year period. For shares issued between 17 March and 5 April 2016, the holding period is extended to 6 April 2019.

Other ways to reduce the tax bill on the disposal of shares

There are various other options which might be available to individuals to reduce the tax bill arising on disposal of their shares:

Capital losses: Should an individual have available capital losses made on other investments in the tax year of disposal, or in previous tax years, these can normally be set off against the capital gain. However, if the individual qualifies for entrepreneurs' relief and  has other capital gains it would be more tax efficient to offset the capital losses against gains subject to tax at more than 10%.

Annual exemption: To the extent that an individual's annual exemption has not otherwise been used, this will be available to set against their gain. Although, as with capital losses, it may be more efficient to use the annual exemption against gains which do not qualify for entrepreneurs' or investors' relief.

Transfer of shares to spouse/civil partner: If an individual's spouse or civil partner has not made any significant capital gains in the current tax year, it may be tax efficient to ensure that the spouse's annual exemption is used for the tax year in which the shares disposal takes place.

If a spouse or civil partner gives an asset to another spouse or civil partner, there is no tax to pay on the gift itself. The receiving spouse or civil partner is treated as if they bought the asset for the price and at the time that the other spouse did. To qualify for this arrangement, the spouses or civil partners must be living together in the tax year.

'Spouse' for this purpose does not include unmarried partners living together, other than civil partners.

The transfer to the spouse or civil partner needs to be a genuine gift. On this basis, once the shares are given to an individual's spouse or civil partner, that individual will have no right to have the shares or the proceeds of the sale back.

Reinvestment in small companies: Should an individual have any plans to reinvest their sale proceeds in small private companies, this could defer the time at which the tax is payable. For more details see the section on EIS reinvestment relief in this guide to EIS.   For investments in very small companies Seed Enterprise Investment Relief (SEIS) may provide a 50% exemption for gains reinvested in SEIS shares.