Capital gains tax

Tax rates and allowances

The annual exemption for 2020/2021 will increase to £12,300.

No changes were announced to the rates of capital gains tax with the higher rate remaining at 20% and the basic rate at 10%. The former 28% and 18% rates continue to apply to chargeable gains made on the disposals of residential property and the receipt of carried interest, however.

See our table of the main tax rates and allowances for 2020/2021.

Entrepreneurs’ relief

Many predicted that this Budget would result in the abolition of Entrepreneur’s Relief (ER) in its entirety, but the Chancellor has instead proposed a pragmatic compromise to the existing rules.

By way of reminder, the ER rules allow investors to claim for a lower 10% rate of capital gains tax when they dispose of all or part of their business provided they meet certain qualifying conditions. Prior to Budget Day, the ER rules included a capped “lifetime limit” of £10m.

This meant that a taxpayer could no longer benefit from the reduced ER rate of capital gains tax once he or she had claimed ER on more than £10m of qualifying gains. The Budget has slashed that lifetime limit figure to £1m for any qualifying disposals made on or after 11 March 2020.

HMRC had previously faced criticism that it was foregoing large amounts of capital gains tax without receiving a corresponding upturn in entrepreneurial development. The Government notes that although only 17% of taxpayers who claim ER will be affected by this change, those 17% account for 58% of the qualifying gains made under the previous rules. The Government believes that this indicates that ER is being used to shelter gains realised by a small minority of very affluent taxpayers, and ultimately the rules are not incentivising entrepreneurialism as intended.

The Government’s stated intention in making this change is, therefore, to shift the focus so as to encourage only “genuine” risk-takers and entrepreneurs. The initial Exchequer impact costings figures ambitiously predict that the Revenue’s tax base will be expanded by approximately £1.8bn by 2025 as a result of this change.

The new legislation also includes new rules to counter forestalling arrangements to prevent taxpayers from seeking to ‘lock-in’ the higher pre-Budget Day lifetime limit with the purpose of obtaining a tax advantage. This would prevent taxpayers from trying to circumvent the new rules by transferring an asset after 11 March 2020 under a contract made before that date. Similarly, the legislation also provides special rules to determine which lifetime limit figure applies where ER is claimed in relation to share-for-share exchanges which took place in the tax year 2019/2020, but prior to 11 March 2020.