Chris Thorpe looks at recent developments regarding capital gains tax.
These appear to be tumultuous times with respect to tax, with the Labour government having passed one Budget and with a Spring Statement on the way at the time of writing.
Capital gains tax (CGT) has been subject to numerous changes over the last few years; so where are we with it in early 2025?
CGT rates
There were some rumours prior to Autumn Budget 2024 that CGT would be aligned to income tax rates, but that did not come to pass.
The 10% basic rate CGT percentage was instead increased to 18%, with the standard rate being increased from 20% to 24%; this equates to the pre-existing rates for residential properties. Unusually, this rate change took immediate effect for disposals on or after 30 October 2024, resulting in two sets of rates in tax year 2024/25 (although HMRC had already produced the self-assessment return supplementary pages (SA108) for the year without realising this change was forthcoming – a calculator will be provided by HMRC to assist with these hybrid rates in the tax year).
Furnished holiday lettings
From 6 April 2025, the furnished holiday lettings regime ceases to exist, and such properties will cease to be treated as trades and become like any other rental property – an investment asset.
As such, capital allowances cannot be claimed in dwelling areas, the income is not pensionable, business property relief for inheritance tax purposes is definitely not available (it was tricky to claim anyway), and it will not be possible to benefit from any CGT reliefs (i.e., business asset disposal relief (BADR), rollover relief, or holdover relief) for disposals from 6 April 2025. However, if a lettings business ceases prior to 6 April 2025, an owner may sell their property and still claim BADR within the next three years.
BADR rates
For qualifying gains for BADR and its 10% rate, such disposals taking place on or after 6 April 2025 will be subject to a 14% rate; from April 2026, this becomes 18%. Those changes will be along tax year lines, so for five months, a 10% BADR rate will still be available despite the new CGT rates.
In March 2020, BADR (previously called ‘entrepreneurs’ relief’) had a lifetime allowance of £10m, (i.e., the first £10m of gains within one’s lifetime qualified for the relief). Thereafter, the allowance was lowered to £1m and BADR was effectively abolished for all those who had already claimed relief for beyond that amount.
Trustees of interest in possession (IIP) trusts are also able to claim BADR where the ‘qualifying beneficiary’ (i.e., life tenant) is operating the business whose personal trading company shares or assets they hold. The legislation states that the life tenant must be a qualifying beneficiary at the time of the assets’ sale, however, HMRC had insisted that they must have been such for at least two years prior to sale. The Court of Appeal, in Quentin Skinner 2015 Settlement v HMRC [2022] EWCA Civ 1222 held that the First-tier Tribunal had been correct in finding that the legislation means what it said, and that the IIP needed only to be in place at the time of sale.
Investors’ relief (the business angels’ equivalent of BADR, requiring that the investor is not an officer or employee of the company) still has, until 6 April 2025, a lifetime limit of £10m; thereafter, it will be lowered to £1m in line with BADR.
Practical tip
April 2025 marks significant changes for CGT and some of its reliefs, but the actual rates of CGT changed immediately as at the date of the Budget; be warned that there are two separate sets of CGT rates in 2024/25. Those who wish to take advantage of investors’ relief also need to be mindful of the lifetime limit change; the £10m has been in place since the relief’s inception and with BADR taking the limelight, the reduction in the limit to £1m could potentially be overlooked.
