taper relief

Taper relief was introduced into the UK taxation regime with effect from 6th April 1998. Its purpose is similar to indexation, in that it aims to reduce the amount of capital gains tax you have to pay when you sell shares, to account for the effect of inflation.

But there is a critical difference. Whereas indexation works by increasing the base cost of an asset, taper relief works by reducing the gain by a 5% a year for every year it was held regardless of the base cost. This is significant because if the base cost of an asset was zero, indexation does not help. Taper relief, on the other hand, does.

• To qualify for taper relief, your shares have to be held for a minimum of 3 years. If you sell within that period, no taper relief will be available.
• For each whole year that you have held shares from the date of acquisition to the date of disposal, you can reduce the gain by 5%. The maximum relief available is 40%, after 10 years.
• Assets held on or before 17 March 1998 qualify for an additional year of taper relief, and the 'three year' requirement does not apply.

Example

• You buy 1,000 shares in Multimower plc in February 1998 for £2,000
• You sell the shares in August 2000 for £5,000
• You pre-taper gain is £3,000. Taper relief is available for three years (15%) = £750
• Your reduced gain is £2,250

Note that in the above example, taper relief was available even though the shares had not been held for three years, because they were owned on 17th March 1998.

Taper relief applies to each individual share acquisition, so if you dispose of a holding built up over a number of years after 5 April 1998 then the gain on each acquisition has to be calculated individually and taper relief applied to each one individually. The good news is that a holding which you had at 5 April 1998 can be treated as one element, as shown above.