Basics of Capital Gains Tax

Capital Gains Tax (CGT) is payable on most lifetime disposals of assets (e.g. farm property or investments) that have increased in value. CGT applies regardless of whether the disposal is for money, or a gift, or an exchange for another asset.

For CGT, a gift is treated as if it were a disposal at full market value. This market value rule also applies for disposals at undervalue to close relatives (including siblings and lineal descendants) and for other disposals which do not represent a ‘bargain at arm’s length’.

CGT is payable by UK residents on disposals of worldwide assets.

The amount taxable is calculated after deductions for:

• The acquisition cost (or ‘base cost’) of the asset.

• Incidental costs of acquisition and sale (e.g. legal, estate agent and Land Registry fees).

• Enhancement (or improvement) expenditure.

• Reliefs and exemptions.

• Any available losses.

• The annual exemption

Rather unfairly in the higher inflation environment of recent years, there is no longer any adjustment for inflation or length of ownership. Gains resulting from general inflation are fully taxable.

Acquisition cost

For an asset that was purchased at arm’s length (e.g. farmland bought on the open market), the base cost is the price originally paid less any capital gain that was rolled over into the purchase.

For an asset that was inherited, the base cost is the market value at the date of death. Where inheritance tax (IHT) was paid on the deceased’s estate, the probate value is binding on both the taxpayer and HMRC (subject to possible adjustment for joint ownership discount).

For an asset that was acquired by gift, the base cost is the market value at date of acquisition less any capital gain that was held over on the gift.

Whenever using valuations, it is prudent (although not mandatory) to obtain a ‘red book’ valuation from a chartered surveyor.

Being able to disclose ‘red book’ valuation information reduces the risks of HMRC challenge, and of interest and/or penalties on additional tax payable after enquiry. In the event of HMRC enquiry, it is often necessary for the valuations to be negotiated between the District Valuer (acting for HMRC) and your land valuer.

The costs of obtaining a valuation are deductible in the CGT calculation as incidental selling expenses, but the costs of a valuer’s later work (eg during an enquiry) are not deductible.

Enhancement expenditure

The deduction for improvement costs is limited by statute to amounts incurred by the taxpayer for:

• Enhancing the value of the asset, and still reflected in the state or nature of the asset at the time of the disposal; and/or

• Establishing, preserving or defending title to, or a right over, the asset.

Thus the cost of adding a conservatory is deductible where it is still in place at the time of disposal. But there is no deduction for the cost of adding a conservatory that was demolished again prior to sale.

Routine repairs and maintenance (revenue expenditure) are not deductible for CGT.

Reliefs and exemptions

Reliefs and exemptions can dramatically reduce or eliminate the CGT payable. These include:

Spousal transfers

Transfers to a spouse or civil partner (with whom you are still living) are generally treated as taking place on a ‘nil gain/nil loss’ basis. That means there is no immediate CGT liability and your spouse or civil partner takes on your original base cost.

There are further special rules for separating/ divorcing couples.

Main residence relief

Main residence relief usually results in no CGT payable on the disposal of a dwelling (eg the farmhouse) that has been the owner’s only or main residence throughout the ownership period. ‘Dwelling’ includes an ordinary domestic garden, but the relief does not cover parts of the property that are ‘outside the curtilage’ or have been used exclusively for non-domestic purposes.

There are special rules for spouses (e.g. they can only have one main residence between them), and time-apportionment usually applies where a dwelling has not been the only or main residence throughout the whole of the ownership period.

Holdover relief

Holdover relief can be claimed not only on gifts, but also on sales at an undervalue where the proceeds amount to less than the CGT base cost.

Partial holdover relief may be available in other situations involving a sale at undervalue.

A holdover relief claim must be countersigned by the transferee (except for gifts to trusts). Holdover relief reduces or eliminates the CGT payable by the transferor, but leaves the transferee taxable on the transferor’s gain in the event of a later disposal.

Holdover relief is often claimed on lifetime gifts of farm property.

Rollover relief

Rollover relief is also widely used by farmers. It can be claimed on the reinvestment of the whole proceeds from sale of an asset (typically farmland) that was used for the taxpayer’s trading business throughout the ownership period. The new asset must be purchased within 1 year before and 3 years after the disposal, and must be taken into use for the taxpayer’s trade immediately on purchase.

Partial rollover relief may be available where the old asset proceeds are not wholly reinvested. The un-reinvested proceeds are taxed.

Rollover relief reduces or eliminates the taxable gain on the disposal, but also reduces the CGT base cost of the new asset by the same amount.

Eligibility for rollover relief is too often prejudiced by errors of detail (e.g. purchasing the new land in a different name, or not reinvesting sufficient proceeds). On the other hand, eligibility can sometimes be created by selling the old asset piecemeal. If contemplating rollover relief, please contact us for advice before you make the sale.

Business asset disposal relief

Business asset disposal relief (BADR) allows up to £1m of qualifying lifetime gains to be taxed at a preferential CGT rate. With the increase in BADR rate to 18% from 6 April 2026, this relief is much less meaningful than previously, but it should still be considered where a business interest is being reduced.

Chattels relief

Chattels relief exempts most moveable physical assets (eg antiques, vehicles, guns, equipment) from CGT where the proceeds are less than £6,000. For a set of items, the £6,000 limit applies to the set rather than each individual asset.

Chattels relief is not available for assets that were, or could have been, claimed for capital allowances. This tends to restrict its application to personal, rather than business, items.

Annual exemption

The annual exemption is now just £3,000 for an individual.

Non-UK residents

There are special rules for individuals who become non-UK resident before disposing of assets here, and stay non-UK resident for 5 compete tax years.

Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS)

EIS and SEIS are very high risk financial investments with very favourable tax reliefs. Inter alia, those tax reliefs include ability to defer CGT on another disposal until the EIS/SEIS investment is sold. Unlike normal rollover relief, only the amount of the gain (not the full sale proceeds) needs to be reinvested for EIS/SEIS deferral.

CGT rate

The current CGT rate is 18% for gains up to the unused amount of a taxpayer’s basic rate band (ie between £nil and £37,700) and 24% thereafter.

CGT reporting and payment

Most capital gains are reported only in the annual tax return, with the CGT payable by 31 January following the tax year end. However, a special CGT return is required within 60 days of the completion date where either:

• Tax is payable by a UK resident on a disposal of an interest in a dwelling; or

• A non-UK resident disposes of (any) UK property (regardless of whether tax is payable).

Where a special CGT return is required, the CGT must also be paid within 60 days of completion.

Conclusion

Many farmers have a broad awareness of CGT, including reliefs such as rollover and holdover, but there are major traps in the technical detail.

If you are considering selling or gifting an asset, please discuss this with us well in advance of the transaction, so there is sufficient time to explore and implement appropriate tax planning opportunities, and so you fully understand the consequences if a tax liability will be triggered.