Capital gains tax for individuals on the disposal of UK shares

The 'gain' on which CGT is charged

CGT is charged on the gain made from a chargeable 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. For the tax year starting 6 April 2024, the annual exempt amount is reducing from £6,000 to £3,000. Most trustees have an annual exempt amount of half the amount that applies for individuals.

Certain assets are exempt from CGT, such as an individual's primary residence - this is known as principal private residence relief.

Individuals who are not UK resident for tax purposes are not subject to CGT on shares in UK companies, unless they return to the UK within five years of leaving. Non-UK tax resident individuals are, however, subject to UK CGT on gains on property and land in the UK. 

Rate of CGT

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

Generally, basic rate taxpayers pay CGT at a rate of 10%. CGT is payable at a rate of 20% for higher and additional rate taxpayers, unless business asset disposal relief or investors' relief is available (which will reduce the rate to 10%).

Currently, CGT is payable at the higher rates of 18% and 28% for residential property not qualifying for the principal private residence relief, and on 'carried interest' - the share of profits of an investment fund, which typically benefits private equity executives. From 6 April 2024, the higher rate of CGT for residential property gains decreased to 24%.

Business asset disposal relief

Business asset disposal relief (BADR), formerly known as 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 £1 million of gains that can be reduced by BADR.

For the disposal of shares in a company to be eligible for BADR, 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 individual's must own at least 5% of the company's share capital; 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 an individual to satisfy the 5% shareholding condition 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% shareholding 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.

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

The conditions for BADR must be satisfied right up until the disposal of the shares. Care should be taken to ensure that the individual's 5% shareholding is not diluted prior to disposal, for example by others exercising share options. If an investment by an external investor on or after 6 April 2019 causes the individual's shareholding to fall below 5%, the individual can effectively 'bank' BADR on gains that have arisen up to the date of investment.

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.

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; and
• 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.

Acceptable tax planning when disposing of shares

There are various other options which might be available to individuals to reduce the CGT payable on a disposal of shares.

Capital losses

Generally, capital losses made on other investments in the tax year of disposal, or in previous tax years, can be set off against the capital gain. However, if the disposal qualifies for BADR and the individual 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. As with capital losses, it may be more efficient to use the annual exemption against gains which do not qualify for BADR or investors' relief and therefore where the tax rate is higher than 10%.

Reinvestment in small companies

It may be possible to defer payment of CGT by reinvesting the sale proceeds in small private companies. For investments in very small companies Seed Enterprise Investment Relief (SEIS) may provide a 50% exemption for gains reinvested in SEIS shares.