Capital Gains Tax Taper Relief

The implications of Capital Gains Tax (CGT) for asset-holding individuals can be significant. As is explained elsewhere on this site, CGT is a potentially large outlay, particularly for investors. The current CGT schedule allows for the transfer of personal assets (for example main homes or cars) without a charge, but investments such as stocks and shares are likely to attract CGT in some form when they are disposed of. Taper relief allows for the mitigation of CGT liabilities when assets that would otherwise be chargeable to CGT have been held for a significant period.

CGT Basics

As a general principle, charges under Capital Gains Tax arise when certain assets are disposed of, whether this disposal takes the form of a sale, exchange or gift. Where the value of the asset has risen during the period in which it was under the ownership of the individual in question, the individual in question will be deemed to have made a 'chargeable gain' that will attract CGT. There are a number of reliefs available against these liabilities. Particularly important is the right to offset capital losses made by a trust against any gains. In many cases, this will allow for the chargeable gains to be reduced to less than the annual exempt amount, and no charge will therefore be made.

Taper relief is another important method by which trusts and individuals can reduce their CGT bill. This type of relief is taken into account after all other reliefs have been used and after allowable losses have been taken into account. In principle, it allows for a sliding scale of relief, with 'discounts' linked to the duration of the ownership of the asset. So, an asset that has been held in trust for 10 years, for example, will attract a lower CGT charge under the taper relief scheme than an asset that has been held in trust for 5 years.

Qualifying Holding Periods

The rules regarding taper relief differ depending on the nature of the asset, with relief being offered more quickly for business assets. Where a business asset is disposed of, taper relief is offered if it has been under the ownership of the trust for a year or more. This is known as the qualifying holding period. Business assets under the ownership of the trust for between one and two years will attract only 50% of the normal charge, while business assets with a qualifying holding period of two years or more will have the total charge reduced to 25%.

Taper relief is offered less quickly and with smaller potential gains for personal assets. To begin with, the qualifying holding period must be a minimum of three years before any relief is offered. After this point, the chargeable gains are reduced at a rate of 5% per year, with a maximum discount of 40%. In this way, non-business assets held for a qualifying holding period of 10 years or more will have a chargeable gain of 60% of the normal rate.

It should also be noted that, while most chargeable gains qualify for taper relief, there are some instances in which this scheme will not apply. If you are a beneficiary of a non-resident or dual resident trust, any capital gains made through your involvement with this trust will not qualify for taper relief. Similarly, the scheme is not available to settlors of trusts if the individual has previously been temporarily non-resident in the UK.