Capital Gains Tax: playing a game with changing rules (March 2008)
Imagine playing a game in which the rules change as you go along. That is how it feels to be advising on Capital Gains Tax (CGT) at present.
The radical reform of CGT which the government proposes to introduce from 6 April 2008 has at last taken shape in draft legislation published on February 28. The main features of the changes are:
- assets held on 31 March 1982 will be 'rebased' to their value on that date;
- indexation allowance will be abolished;
- taper relief will be abolished;
- a flat rate of 18% will apply to all gains, regardless of the type of asset disposed of;
- a new entrepreneurs’ relief will be introduced for business owners and shareholders who are employees or office holders.
Whilst the new rules will generally be favourable to investors in property and quoted shares, there are a number of categories of taxpayer who potentially face a higher tax bill.
Entrepreneurs’ relief
Entrepreneurs’ relief is a late addition, made in response to widespread protests against the original proposals, which would have removed tax incentives to entrepreneurship. The main features of entrepreneurs’ relief, which will only be available to sole traders, partners and trading company shareholders who own at least 5% and are a director or employee, include:
- a 10% tax rate on the first £1 million of all qualifying gains over a lifetime;
- relief on 'associated disposals', such as when an exiting shareholder sells the business premises as well as his or her shares;
- business sellers who receive qualifying corporate bonds (QCBs) in exchange for shares will be able to lock in their entrepreneurs’ relief;
- some, but not all, existing QCB holders will be able to claim entrepreneurs’ relief when they sell, but only if they would have qualified for the relief, if it had been in force when they acquired their QCBs before 6 April 2008;
- share sellers who receive non-QCBs or replacement shares that do not qualify for entrepreneurs’ relief will be able to elect to crystallise their entrepreneurs’ relief (and pay the tax) at the time of the exchange;
- in order to qualify, the asset must have been held for at least a year;
- in some circumstances, a family trust may be able to qualify for the relief;
- employees and office holders will not have to have worked full time to qualify.
Entrepreneurs’ relief – not all good news
The lifetime nature of the relief ignores the fact that many entrepreneurs will dispose of more than one business during their career. Once the £1,000,000 threshold is exceeded, all gains will be taxable at the flat rate of 18%.
Entrepreneurs’ relief will only apply to a shareholder who is an officer (usually a director) or employee who holds at least 5% of the shares. As a consequence, various shareholders who would have qualified to pay CGT at a rate of 10% will lose out, including:
- investors disposing of shares in an unquoted or AIM company after 5 April 2008;
- shareholders in family trading companies who do not satisfy the employee or director test (for example, minors);
- employee shareholders who do not hold the required 5% in their company;
- business angels who are not employees or directors of the companies in which they invest.
The next steps
All taxpayers should immediately consider how the new rules impact on them. Leaving consideration of possible actions until the middle of March will be too late, especially with the Easter holidays falling before 5 April.
Is it worthwhile taking action to trigger a gain – and thus a tax liability – before 5 April, to preserve the benefit of the existing tax reliefs? For those expecting to sell soon anyway, bringing the gain forward may be worthwhile, but those looking to hold their businesses for a longer term are unlikely to want to take such a risk.
It is not possible to give definitive guidance when every individual's situation is different, but it is possible to take steps to assess the possible benefits and risks, and to prepare. You are welcome to contact your usual Baker Tilly representative for further discussion.
© Baker Tilly UK Group LLP, all rights reserved, 03.08
This technical briefing is designed for the information of readers. Whilst every effort has been made to ensure accuracy, information contained in this briefing may not be comprehensive and recipients should not act upon it without seeking professional advice from their usual professional adviser.
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