CGT Taper Relief

Introduction

Taper relief is a potentially valuable relief from Capital Gains Tax (CGT). The relief was introduced with effect from 6 April 1998. This '1 Minute Guide to Taper Relief' briefly outlines ten key points by way of an introduction to this important relief. However, the taper relief rules are potentially complex, and professional advice should be sought in appropriate cases.

10 Key Points

1. Who can claim the relief?
   The relief is available to individuals, trustees and personal representatives. However, taper relief cannot be claimed by companies, as they are potentially eligible to claim indexation allowance instead.
2. How is taper relief calculated?
   Taper relief broadly reduces chargeable gains according to the period of ownership (i.e. the number of whole years for which the asset has been held after 5 April 1998), and whether the asset disposed of is a business or non-business asset.
3. What are the rates of taper relief?
   The rates of taper relief are more generous for business assets than for non-business assets. Business assets attract maximum taper relief of 75% after 2 years (4 years for disposals before 6 April 2002). Full business asset taper relief therefore results in an effective CGT rate of 10% for an individual who is a higher rate taxpayer, or 5% for a basic rate taxpayer. Non-business assets receive no taper relief until year 3 of a 10 year maximum holding period. The rate of relief thereafter is 5% per annum, up to a maximum of 40%. Full non-business asset taper relief therefore results in an effective CGT rate of 24% for an individual who is a higher rate taxpayer or 12% for a basic rate taxpayer (ignoring the annual CGT exemption).
   
   For trustees and personal representatives, from 2004/05 the effective CGT rate is 10% (previously 8.5%) where the maximum business asset taper relief is due, or 24% if the maximum non-business asset taper relief is due (again ignoring the annual CGT exemption).
4. What are 'business assets'?
   There are various categories of 'business assets' to which the higher rate of taper relief applies:
   • Assets used in a trade carried on by the taxpayer (either alone or in partnership). From 6 April 2004, business asset taper relief is extended to an asset used in a trade carried on by any individual, or by any partnership whose members include an individual;
   • Assets used in a trade carried on by the taxpayer's qualifying company (or by a trading group company, if the holding company is the taxpayer's qualifying company);
   • Assets used in an employee's office or employment working for a trading employer; or
   • Shares in a qualifying company.
   Separate rules apply to certain business asset disposals before and after 6 April 2000. Perhaps the most important of these relates to the definition of 'qualifying company'. These pre and post-6 April 2000 definitions are contained in Inland Revenue Helpsheet IR279 entitled 'Taper relief', which can be downloaded (in pdf format) from the Inland Revenue website.
   
   One of the conditions to meet the 'qualifying company' definition is that the company must be 'a trading company or the holding company of a trading group'. 'Trading company' and 'trading group' have their own definitions, but determining if a company or group satisfies those conditions can be difficult. The Inland Revenue has therefore provided guidance in their publication 'Tax Bulletin' in Issue 53 (June 2001) and Issue 62 (December 2002).
5. What are 'non-business assets'?
   Non-business assets are defined as assets which are not business assets.
6. What is a 'bonus year'?
   If a non-business asset was acquired before 17 March 1998, a 'bonus' year of taper relief is available. For example, a non-business asset acquired on 16 March 1998 and sold on 1 January 2005 qualifies for 25% non-business asset taper relief (i.e. 7 years' effective ownership, being 6 complete years after 5 April 1998 plus the bonus year).
7. How does taper relief interact with losses?
   Taper relief is applied to chargeable gains net of allowable capital losses, in the same year or brought forward from earlier years (or carried back from the year of death). Losses are set against gains so as to result in the lowest tax charge. This means that losses are first deducted from any gains attracting no taper relief, then against gains attracting less taper relief than other gains. Losses brought forward (or carried back) may be restricted so as not to waste the annual exemption. However, losses are effectively 'tapered' when set against gains subject to taper relief.
8. What if there is mixed business and non-business use?
   If an asset has been used partly as a business asset and partly as a non-business asset (i.e. during different periods of ownership, and/or at the same time) during the last 10 years' ownership (or since 6 April 1998, if later) until disposal, the chargeable gain is calculated and apportioned between business and non-business use of the asset. Business asset taper relief is applied to the business element of the gain, and non-business asset taper relief to the remainder, as if two separate gains had arisen on the disposal of different assets. The two gains are then added together.
9. How does taper relief work when assets are transferred between spouses?
   On transfers of assets between spouses on a no gain/no loss basis, the combined ownership periods of both spouses are taken into account for taper relief purposes. For disposals of shares and securities, whether they are treated as a business asset at any time during the combined ownership period is determined by reference to the individual making the final disposal. For other assets, the asset is treated as a business asset for that part of the ownership period of the transferor spouse during which it was in qualifying business use by either of them. The rate of taper relief for the ownership period of the transferee spouse will depend on the use by that spouse.
10. How does taper relief interact with other CGT reliefs?
    If gift holdover relief has been claimed on the earlier disposal of an asset, on the subsequent disposal of that asset taper relief applies to the holding period of the asset's new owner. If rollover relief has been claimed on the disposal of a business asset, taper relief applies by reference to the holding period of the new asset. If the gain on disposal of an asset is deferred until a later disposal (e.g. reinvestment in depreciating assets) taper relief will normally depend on the ownership period of the asset on which the deferred gain arose.

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Article Added Friday, 01 October 2004

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