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REFORM OF CAPITAL GAINS TAX (CGT) - ENTREPRENEUR'S RELIEF

The Chancellor’s Pre-Budget Report in 2007 announced a significant change in the CGT regime for individuals, trustees and personal representatives. Following aggressive lobbying from various industry groups, the Chancellor has introduced Entrepreneur’s Relief.  It is important to note that CGT will still be charged at a new flat rate 18% on all gains which are not sheltered by the Relief.  The changes will take effect from 6 April 2008.

The relief

The relief will be available in respect of:

• gains made on the disposal of all or part of a business (including professions and vocations, but not property letting businesses unless furnished holiday lettings);
• gains made on disposals of assets following the cessation of the business (within three years of cessation);
• by certain individuals who were involved in running the business.
• gains on disposal of shares in a trading company providing that the individual making the disposal has been an officer or employee of the company, or of a company in the same group of companies AND owns at least 5% of the ordinary share capital of the company or that holding enables the individual to exercise at least 5% of the voting rights in that company.

A trading company is defined in the same way as under the Taper Relief regime (broadly speaking any turnover, assets owned by the company or time devoted by the employees must not exceed 20% if it relates to non-trading activities or assets).  The relief is also available to the trustees on gains made on assets used in a business.  The beneficiary must be involved in the carrying on of the business in question, either personally or as a partner.  In the case of shares, the beneficiary must be an officer or employee of the trading company whose shares are held by the trust.

How it operates

The conditions for relief must be met for a period of at least one year.  The gain eligible for relief is reduced by 4/9ths and then the balance of the gain is taxed at 18%.  This ensures an effective tax rate of 10% (subject to further reduction using capital losses or the annual exemption). 

There is a lifetime limit of £1 million.  Once this has been exceeded, all future chargeable gains will be taxed at 18%.

What are the practical implications and who is affected by the changes?

• Tax payers will now need to keep a lifetime record of chargeable gains made in order to identify when the £1 million limit has been breached
• Shareholders who currently meet the 5% holding and employee requirement will not be affected by the changes
• Shareholders who will have previously qualified for the business asset taper relief (BATR) on the disposal of shares will not qualify for the new relief if they are not an employee or officer of the company.
• Although the relief has been introduced to ‘soften the blow’ of losing BATR there is no such concession for the loss of indexation, therefore any individual holding a qualifying asset which was acquired pre-March 1998 will lose the accrued indexation relief on 6 April 2008.  For assets held in March 1982 the lost indexation allowance is 104.7% of the higher of the cost or market value at March 1982

Additional planning point

If a spouse or civil partner transfer a pre-March 1998 asset to the other spouse/civil partner, the indexation is preserved and will be available to reduce any post-5 April 2008 gains.

If you would like any assistance in respect of the above issues, please contact our Tax Partner, Ewen Scott or our Tax Manager Phil Donegan on either of the numbers below.

Glasgow -          0141 354 0354                          
Edinburgh -        0131 228 7979