Autumn Budget 2024 - Capital gains tax (Rates, BADR and investors’ relief)

Today’s Budget has unveiled the much-anticipated changes to capital gains tax.  The concern of an alignment of rates with income tax has not materialised, with the government instead opting for more modest rate increases.  Despite widespread criticism and expectations that it would be abolished, business asset disposal relief (or “BADR”, formerly entrepreneurs’ relief) remains in place, albeit with the rate set to increase.  The rate of investors’ relief will likewise increase, and the investors’ relief lifetime allowance falls from £10million to £1million. 

These changes are accompanied by detailed anti-forestalling rules.  Any taxpayer needs to be aware of the anti-forestalling rules if: (i) they have not yet completed an asset disposal contract signed before Budget Day (30 October 2024); or (ii) they participated in a share reorganisation or share-for-share exchange prior to Budget Day but have not yet elected to disapply rollover relief.  In the latter case, the anti-forestalling rules appear to effectively bring forward the deadline for electing out of rollover relief and claiming BADR or investors’ relief at the current 10% rate.  The anti-forestalling rules may also affect a disposal, reorganisation or share exchange taking place between Budget Day and the end of the 2025/2026 tax year.

Rate changes

Changes to the rates of capital gains tax have been announced for this tax year and the two tax years immediately following.  The eventual outcome will be a simpler regime, with just two rates and no distinction between different types of assets, but the changes will be phased in between now and 6 April 2026.  The new rates are as follows: 

• The main rates (i.e. the rates applicable to assets other than carried interest and residential real estate) are rising from 10% to 18% at the basic rate and from 20% to 24% at the higher and additional rates.  The new rates will apply to disposals made on or after Budget Day. 
• The rates applicable to carried interest are rising from 18% (basic rate) and 28% (higher/additional rate) to a unified rate of 32% with effect from 6 April 2025.  This is an interim measure which will apply only to the tax year 6 April 2025 to 5 April 2026, after which carried interest gains will be within income tax (albeit at 72.5% of usual rates, giving an effective rate of 32.625% for additional rate taxpayers).  
• The rates applicable to residential real estate assets are being left unchanged at 18% (basic rate) and 24% (higher/additional rate). 
• The main rate payable by trustees and personal representatives will rise from 20% to 24% with effect from Budget Day. 
• The BADR and investors’ relief rates will remain unchanged for the remainder of the current tax year, rising to 14% for the tax year 6 April 2025 to 5 April 2026 and again to 18% for the tax year 6 April 2026 to 5 April 2027. 

The lifetime allowance for investors’ relief will fall from £10million to £1million with effect from Budget Day. 

The following table shows the expected rates for the current tax year and the two immediately following: 

Anti-forestalling rules

The changes are accompanied by a number of detailed anti-forestalling provisions, intended to prevent taxpayers from circumventing the new rates and rules. 

Assets transferred on or after Budget Day under a contract entered into before Budget Day

When an asset is disposed of under contract, the time of disposal for capital gains tax purposes is the date when the contract is signed or (if the contract is conditional) when the contract becomes unconditional, and not (if different) when the contract is completed.  This rule can be important when determining the rate which applies to a disposal; all rate changes necessarily take effect from a particular date and, where an asset is disposed of on or after that date under an unconditional contract which was in place prior to that date, then on the face of it, the applicable rate is the one that prevailed before the change.  For example, if an unconditional contract for the sale and purchase of an asset was signed on 29 October 2024, then (in the absence of anti-forestalling rules) the pre-Budget rates would prevail, notwithstanding that the contract completes (and so the asset is, in reality, disposed of) on or after Budget Day when the new rates are in effect. 

This provides tax planning opportunities for individuals who fear an imminent rate increase, to “lock in” current rates by accelerating the date of signing a sale contract.  In order to counter-act this form of planning, the rate increases taking effect from Budget Day are accompanied by anti-forestalling rules.  Where a taxpayer transfers an asset on or after Budget Day pursuant to an unconditional contract in place prior to Budget Day, the taxpayer will only be able to apply the pre-Budget Day rates of capital gains tax if the following two conditions are met:  (i) the contract was not entered into with the purpose of leveraging the above-mentioned time of disposal rule to secure the old rates; and (ii) (where the parties to the contract are connected) the contract was entered into for wholly commercial reasons.  Otherwise, the taxpayer will be taxed as if the date of disposal were the date when the asset was transferred.  Additionally, for a taxpayer who has gains in excess of £100,000 accruing in this way, the taxpayer must make a claim if they wish for the old rates to apply, with the claim containing a statement that the above-mentioned conditions are met. 

The above rules will also apply when determining whether the old or new investors’ relief lifetime allowance will apply to a disposal. 

Any taxpayer who has made such a disposal and wishes the pre-Budget Day rates and rules to apply to it, will need to consider whether they have sufficient evidence to demonstrate that the above conditions are met.  HMRC guidance on the similarly-worded rules which applied in 2020 (when the lifetime allowance for BADR was lowered from £10million to £1million) suggests that the rule is only intended to apply where the contract itself was entered into in order to leverage the capital gains tax timing rules; i.e. where a contract is signed with a newly incorporated company purely to time a disposal for capital gains tax purposes.  Where a sale is made for entirely commercial reasons, and the timing of the sale contract’s signing is accelerated to beat the Budget Day date, the guidance suggests that the rule would not apply.

As the increases to the BADR and investors’ relief rates come into effect on 6 April 2025 and 6 April 2026, for the purposes of determining which rate of those reliefs applies to a disposal, the above anti-forestalling rules will also apply where an asset is transferred on or after one of those dates pursuant to an unconditional contract in place prior to the date on which the increased rate starts to apply. 

Pre-Budget Day share reorganisations

Where a taxpayer’s shares are the subject of a share reorganisation or share-for-share exchange (i.e. the shares are not liquidated, but merely exchanged for different shares), “rollover” relief typically applies to ensure that the reorganisation or exchange is capital gains tax neutral.  This is normally helpful to the taxpayer, as it prevents a “dry” tax charge from arising.  However, it can work against the taxpayer, if the old shareholding is eligible for BADR or investors’ relief but the new one is not.  In these circumstances, the taxpayer is permitted to elect out of rollover relief and crystallise the gain at which the old shares are standing, in order to use up his entitlement to BADR or investors’ relief in respect of the shares before it is lost going forward. 

The election can usually be made at any time on or before the first anniversary of the 31 January following the tax year in which the reorganisation or exchange takes place; for example, if a reorganisation took place in the tax year 6 April 2023 to 5 April 2024, the deadline for electing out of rollover in respect of it would be 31 January 2026; for a reorganisation in the current tax year, the deadline is 31 January 2027. 

The following anti-forestalling rules have been introduced to prevent taxpayers from avoiding the new BADR / investment relief rates and rules by electing to trigger gains on historic share reorganisations or exchanges: 

1. Where a share reorganisation or exchange occurred on or after 6 April 2023 but prior to Budget Day, and as at Budget Day the taxpayer has not elected out of rollover relief, the anti-forestalling rules will (subject to various detailed conditions) operate so as to apply the rates of BADR and investors’ relief prevailing at the date of any subsequent election (and not the date of the share reorganisation or exchange).  Importantly, this appears to give taxpayers a window between Budget Day and 5 April 2025 to claim the current 10% BADR or investors’ relief rate on a pre-Budget Day share reorganisation or exchange; and
    
2. If a share reorganisation or exchange has taken place on or after 6 April 2023 but prior to Budget Day, and as at Budget Day the taxpayer remains eligible for investors’ relief in respect of the shares (or would do but for not yet having satisfied the three year holding period requirement) and has not elected out of rollover relief, the taxpayer cannot now avail himself of the pre-Budget Day investors’ relief lifetime allowance by electing out of rollover.  An election can still be made, but any gain will be subject to the post-Budget Day lifetime allowance. 

Any taxpayer who has participated in a share reorganisation or exchange between 6 April 2023 and 29 October 2024 where the conditions for BADR or investors’ relief were met in respect of the shares, should immediately review his position in light of these changes. 

Share reorganisations and exchanges between Budget Day and 5 April 2026

In respect of share reorganisations and exchanges taking place on or after Budget Day and before 6 April 2026, the anti-forestalling rules may operate so as to apply the rate of BADR or investors’ relief prevailing at the date when an election to disapply rollover relief is made. 

Where the rules apply, this would mean that:

1. in respect of a reorganisation or disposal occurring between 30 October 2024 and 5 April 2025, the taxpayer would need to make the election by no later than 5 April 2025 in order to benefit from the current 10% rate; and
    
2. in respect of a reorganisation or disposal occurring between 6 April 2025 and 5 April 2026, the taxpayer would need to make the election by no later than 5 April 2026 in order to benefit from the 14% rate forecast to prevail during the 2025-2026 tax year. 

These deadlines are very tight, requiring taxpayers in some cases to make the election very shortly after or even on the same day as the relevant share reorganisation or exchange (although theoretically there seems to be no bar to making an election in advance of the share reorganisation or exchange), and in all cases taxpayers would need to make the election before having filed the tax return for the relevant tax year. 

Any taxpayer participating in or considering a share reorganisation or exchange between now and 5 April 2026 where the conditions for BADR or investors’ relief are met in respect of the shares, will need to consider whether the anti-forestalling rules could apply and, if so, be mindful of these deadlines.