Taxing Matters

Everybody is aware that last October, the chancellor announced a comprehensive reform of capital gains tax. He proposes to abolish indexation relief and taper relief with effect from 6 April 2008 and for the tax to be charged at a flat rate of 18%.

One or two people have suggested that this might not be such a good idea. He has therefore been thinking about it—but not much because the result is that the proposals remain unchanged, but with a sort of modified retirement relief for those disposing of a business. I think somebody might have reminded him that the introduction of taper relief was to replace retirement relief in the first place.

So we now have a new relief called “Entrepreneur Relief ” which is available for gains made on the disposal of all or part of a business, or shares in a trading company, by those who were involved in running the business. Unfortunately the details have not yet been made available and we only have a press release to explain how it will work. The first £1m of gains will be charged at 10% and the rest will be chargeable at the new flat rate of 18%. There are some resonances with retirement relief and also with taper relief, but to think of the new relief in terms of either is confusing because not all the features of either of these reliefs are reproduced.

Who benefits?

The relief will only apply to gains arising on the disposal of a trading business or shares in a trading company—or the holding company of a trading group—providing that the individual (of any age) making the disposal has been employed by the company and has held 5% of the shares (or more precisely, shares which have 5% of the votes), for at least one year. This will cut out a huge number of people who previously qualified for taper relief—and inexplicably, these will inevitably be the smallest employee shareholders in large company share schemes, who obviously will not have a 5% holding.

Trustees will be able to benefit from this relief— providing that a beneficiary with an interest in possession in the assets is involved in carrying on the business or is an employee of the company. Where a business is not disposed of as a going concern but just ceases, the relief will be available on disposals of the assets within three years of the cessation of the business. There will also be a relief for “associated disposals” of assets which are used in the business, eg a director who owns the company’s premises or a member of partnership who owns the partnership premises.

HM Revenue & Customs (HMRC) confirms that there will be no anti-avoidance legislation to prevent people taking advantage of the current rules—although its confirmation is  intensely irritating. It says that by announcing these reforms “taxpayers have a six month opportunity to arrange their affairs for instance to make disposals in the current year if they wish”. The last time I looked, the period from 24 January to 5 April is just over two months, and it has not published the details yet. Why does it say such things?

It is (just) possible that this relief might improve the position of those who have been trapped by the abolition of taper relief—for example where somebody has disposed of their shares for loan notes which will not be redeemed until after 5 April 2008 and will therefore be caught by the new regime. They will lose the taper relief and indexation, having their effective rate of tax approximately doubled.

The new relief might still apply—assuming they were employed by the company, and had 5% of the shares for more than one year— although they would no longer have shares in the company. But you never know, and this cannot be clarified until we receive the draft legislation on this new relief—which might be published on Budget Day; 12 March.