Chancellor announces changes to CGT proposals
In last year’s pre-Budget report, Alastair Darling, the Chancellor of the Exchequer announced plans to radically overhaul the Capital Gains Tax (“CGT”) system. Over many years, Chancellors (including Gordon Brown) have amended the CGT reliefs and allowances with incessant regularity. It is fair to say that taken as a whole these changes had produced a very complicated and cumbersome tax regime.
Mr Darling therefore promised last year to scrap all reliefs and rules and introduce one rate of tax; 18% to be charged on all gains arising after the 5th April 2008. Although this will substantially simplify the system there was one perceived injustice to the proposals. That was that at present business owners and shareholders in private businesses only have to pay an effective rate of 10% when they dispose of their business assets. An 18% flat rate would therefore have amounted to an 80% increase in the tax rate.
Many business leaders and organisations have lobbied the Government hard on this point and the Chancellor has now announced changes to his original “scrap it all” approach in order to introduce a new relief. This is to be known as the Entrepreneur’s Relief.
The new relief will apply to the disposal of an interest in a trading business as from the 6th April 2008 onwards. The qualifying rules are somewhat cumbersome, but essentially shareholders, partners, members and sole traders who own an interest in a private trading business will qualify for a tax rate of 10% on the gains attributable to those business assets providing:-
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They have owned the business interest for at least one year;
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They own at least 5% of both the issued capital and the voting rights; and
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The business is trading at the date of disposal.
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The sting in the tail, however, is that the 10% tax rate will only be available on the first £1M of chargeable business gains generated by the tax payer after the 5th April 2008 over their lifetime. Therefore a serial entrepreneur who starts up or buys businesses, develops them and then sells them on will have to keep records of all his chargeable gains made after the 5th April 2008. Once he has accrued gains exceeding £1M, any further gains will then be taxed at the standard rate of 18% and then it seems there will be no way for that taxpayer to ever qualify for the relief again.
If you have an interest in a business that you have owned for many years, then in all probability you will have generated very valuable indexation and taper reliefs which will be lost as from the 6th April 2008. If you are considering selling or passing the business in the next few years it may well be in your interest to dispose of the interest before April in order to crystallise those reliefs before they are scrapped. This can be achieved and still allow you to retain the business interest in the short term with some careful planning. Please speak to us as soon as possible for further information.
Author: Stephen Beck
Published: 01 February 2008