In the Autumn Budget on 30 October 2024, Rachel Reeves made some significant changes to capital gains tax (CGT). The main purpose of this article is to explain some of the knock-on consequences that were not outlined in the speech, but I will also remind you of the headline changes. I will refer to business asset disposal relief (BADR) throughout, even if referring to gains when it was called entrepreneurs’ relief.
The Main Rates of CGT
CGT for gains within the basic rate band increased from 10% to 18% for disposals on or after 30 October 2024; the rate for residential property gains and receipts of carried interest was already 18%.
The higher rate of CGT increased from 20% to 24% to align with residential property rates from the same date (except receipts of carried interest, which remains at 28%).
These new higher rates also apply for trusts and estates from 30 October 2024.
Individuals may allocate any basic rate band, capital losses and their £3,000 annual exempt amount against whichever gains they choose, but gains eligible for BADR are always deemed to use the basic rate band before it is allocated against other gains.
The Finance Bill published after the Autumn Budget 2024 contains various specific provisions relating to this mid-year change. For example, gains or losses treated as accruing to an individual under TCGA 1992, s 1M (temporary non-residents) in the tax year 2024/25 are to be treated as accruing before 30 October 2024.
Increase in the BADR Tax Rate
The lifetime limit of qualifying gains for BADR remains at £1m, but the current 10% tax rate will increase to:
- 14% in 2025/26; and
- 18% from 2026/27.
By 2026/27, the maximum CGT saving will be £60,000 (i.e., (24%-18%) of £1m of gains), compared to a £1m saving when the lifetime limit was £10m, less than five years ago.
Presumably, there will come a time when the relief will be completely phased out. The fact that the name was previously changed from entrepreneurs’ relief perhaps indicates that a potentially significant CGT break on disposal of a business does not particularly encourage entrepreneurs.
Where BADR Gains have Previously Been Deferred
There are some situations where gains eligible for BADR have previously been deferred and remain eligible for the relief on a subsequent crystallisation of the gain. Two examples are below.
- Deferred gains from having taken loan note consideration, which subsequently crystallise on redemption and the seller satisfies the relevant BADR conditions in relation to the acquiring company in which the loan notes are held (i.e., the seller holds at least 5% of the ordinary share capital, etc., in the acquirer and works for it for at least 24 months).
- The provisions (at FA 2019, Sch 16) relating to deemed disposals immediately before a fundraising event that would reduce the holding below 5%, where an election has also been made to defer taxation of this deemed BADR gain until a subsequent disposal of the shares.
Note that in these two scenarios, the taxpayer has retained a right to claim BADR at the time of the eventual disposal, not a right to retain a 10% tax rate. Thus, the prevailing BADR rate (and lifetime limit) will apply on crystallisation events from 2025/26 onwards.
Since the coalition government took power in 2010, there have been several changes to when and how gains eligible for BADR may be deferred. See HMRC’s Capital Gains Manual (at CG64135 to CG64171) for further details.
Practical Tip
Where BADR gains have previously been deferred, consider advancing any crystallisation events to take place this year before the BADR tax rate goes up next April.