• Corporate and Commercial Home Page
• Fact Sheets
  • Directors Duties - Companies Act 2006 –s.171 – s.177
  • Fact Sheets Index
• Corporate/Commercial News
  • Entrepreneurs’ Relief and the Capital Gains Tax Reforms
  • Money or safety? Which gets directors disqualified?
  • Chancellor re-instates taper relief for Capital Gains Tax
  • Companies Act 2006 – Briefing Note
  • Have your say on business health and safety laws
  • Cost of regulation for businesses soars to £65.99billion
  • News Index
  • Corporate Manslaughter Act comes into effect
  • More Companies Act measures come into effect
  • OFT offers £100,000 reward for exposing cartels
  • Revised patent rules ‘will help businesses’
  • Some Companies Act provisions postponed for 12 months
  • Nearly half of all family firms have no succession plan
• Commercial Contracts
• Corporate Finance
• Franchising
• Health and PFI
• Insolvency
• Intellectual Property
• I.T.
• Useful Links
• What Our Clients Say

Entrepreneurs’ Relief and the Capital Gains Tax Reforms

In October 2007, the Chancellor Alistair Darling made the controversial proposal to withdraw both (i) Taper Relief on Capital Gains and (ii) indexation allowance, which gives relief for Taxation.

Despite public outcry the Chancellor confirmed that the new flat rate would still be introduced which we assume will be delivered in his Budget Speech in April 2008.

Taper Relief

1. Business asset taper relief reduces the rate of CGT paid by higher rate taxpayers from 40% to 10% if the asset has been held for a minimum of two years.
2. Non-business assets Taper Relief reduces the rate of CGT paid by higher rate taxpayers from 40% to 24% after ten years of ownership.

Flat Rate

Instead of Taper Relief there will be a flat rate relief of 18%, which will apply to individuals, trustees and personal representatives irrespective of the type of asset held or the length of ownership. The government additionally announced the abolition of indexation allowance, compulsory rebasing, withdrawal of halving relief and simplification of the share identification rules.

Entrepreneurs’ Relief

On 24 January 2008, Chancellor Darling, announced the introduction of a new relief for entrepreneurs effective from 6 April 2008. (The draft legislation implementing the new Entrepreneurs' Relief is expected to be published before April, we hope!).

The new relief will provide each taxpayer with a lifetime allowance of £1,000.000.00 of qualifying capital gains. The relief can be used on more than one occasion, but only up to a cumulative total of £1,000.000.00.

This new relief will be disappointing so some successful entrepreneurs as it will only ever equate to a maximum saving in tax of £80,000.00. Once an individuals cumulative gains reach £1,000.000.00, tax will be payable on any excess at 18%. Though the amount of the allowance will be subject to periodic review in the manner usual for tax bands and allowances.

Four ninths of any qualifying gains will be exempt from CGT. At current rates, the effective CGT rate would be 10% (5/9 x 18%) equalling the amount of full business asset Taper Relief as at 5 April 1008 for higher rate taxpayer. However, this will not help lower rate taxpayers who currently pay CGT at 5% on the same gains.

The qualifying gains will be those arising on disposals of:

1. Shares (or securities) of a trading company or holding company of a trading group, if the taxpayer either:
1. has been an officer or employee of the company (or a company in the same group), and held at least 5% of the ordinary share capital, allowing them to exercise at least 5% of the voting rights; or
2. is a trust, which has a beneficiary who qualifies as an officer or employee of the company.
2. All or part of a trading business. Trading business includes professions and vocations but not property letting businesses, other than furnished holiday lettings. This means that buy to let investors will not benefit from the relief when selling a property.
3. Assets formerly used in a qualifying business if they are sold within three years after cessation of the business where the business stopped, rather than being sold as a going concern.
4. Business assets used by a trading company, if they were owned by someone qualifying for the relief on a disposal of shares (or other securities) in the company.
5. Business assets used by a business, if they are owned by a trust, which has a beneficiary who carried on the business, alone or in partnership.

Example

• If you sell your business for a gain of £750,000.00, the Entrepreneurs’ Relief claimed will be £333,333.30 (4/9 x 750,000).
• The taxable gain before allowances will therefore be £416,666.70.
• If the Annual Exemption for 2008/2009 is £9,500.00 (expected but not confirmed till the Budget is published on 12 March 2008) the net gain will be £407,167.00 and the CGT due at 18% will be £73,290.00.
• Any capital losses can also be set-off after the deduction of the Entrepreneur's Relief, which was not the case with Taper Relief.

In general, the relevant conditions will have to be complied with for at least one year in order for Entrepreneurs’ Relief to be applicable. "Holding company", "trading company" and "trading group" will have the same meaning as they do under the Taper Relief rules

Whilst the new Entrepreneurs' Relief may be good news for many shareholders who qualify for the new relief, it is unclear whether it will benefit those taxpayers who disposed of their shares before 2008-2009 tax year and deferred payment of the gain.

Disposal of Assets

Clearly, the announcement of the introduction of the new relief for entrepreneurs will be good news for many shareholders who will be able to use the new relief to its full capacity, as they have not yet disposed of their shares.

It will be particularly be of benefit to shareholders who have held their shares for less than two years (and so would not qualify for full Taper Relief) but for more than one year (the qualifying period for the new relief) and otherwise qualify for the new relief.

Some taxpayers may want to consider selling or otherwise disposing of their assets before 5th April 2008 to take advantage of the current 10% rate without eating into their £1,000,000.00 relief allowance. Though taxpayers may also want to think about spreading their assets among family to take advantage of more than one person’s £1,000,000.00 relief allowance.

Some shareholders may prefer to hold off making a disposal until after 6 April 2008, in order to defer the payment of any tax due until 31 January 2010 (although this would of course "eat into" the shareholder's lifetime entrepreneurs' allowance).

Comment

If you would like some advice on Disposing of Business Assets and the Potential Pitfalls of CGT Please contact Sess Sigre or Russell Hallam