Finally the decision has been made regarding CGT

Chancellor of the Exchequer Alistair Darling bowed to business lobbying on Thursday 24/01/08, when he announced an “entrepreneurs’ relief,” offering small business owners a capital gains tax rate of 10 per cent on lifetime gains of up to £1m.

The new Capital Gains Reform includes:

 
• a new entrepreneur’s relief,
• a new lower tax rate (10%) on entrepreneur's gains, and
• a new £1 million lifetime allowance for gains made by entrepreneurs.

Now individuals are entitled to a £1 million lifetime allowance in respect of any chargeable gains on a business disposal , which forms the basis of a new CGT entrepreneur’s relief. Gains which exceed the annual CGT exemption and do not exceed £1 million will be taxed at 10%. Any gains in excess will be taxed at the mainstream CGT rate of 18%.

Please note, non business gains will all be at the new rate of 18% and taper relief will be scrapped from 6th April.

The relief will apply to entrepreneurs who dispose of all or part of a trading business, trading partnership, or trading company providing that they are a director or employee and hold a stake of at least 5% in the business.

The chancellor said that the measure will also benefit venture capitalists, business angels and all those who take a stake of 5% of more. No changes will be made the to the CGT annual exemption. No changes have been made to EIS, VCT and rollover reliefs. Employee tax advantaged share schemes remain intact such as EMI, etc. He added that anti-avoidance measures are in the pipeline to ensure that income cannot be disguised as capital.

HMRC have given an example of how the relief will work.

Sarah sells her trading business and realises gains of £450,000 (before Entrepreneurs’ Relief). She has made no other claims to the relief and the whole of the gains are eligible for relief. If she claims the relief the gains of £450,000 will be reduced by 4/9ths (£200,000) and £250,000 of the gains will be liable to CGT (subject to deduction of any allowable losses and the annual exempt amount).

Conditions for the new relief to apply

The conditions for the new relief will be based broadly on the old Retirement Relief but the new rules are designed to be simpler:

• there will be no minimum age limit; and
• the relief will be available where the relevant conditions are met for a period of one year.

The relief will apply to gains arising on the disposal of the whole, or a part, of a trading business that is carried on by the individual, either alone or in partnership. Where a business ceases, relief will be available on gains on assets used in the business and disposed of within three years of cessation.

The relief will also apply to gains on the disposal of shares in a trading company, or holding company of a trading group, provided 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

• owned at least 5% of the share capital of the company and that holding enables the individual to exercise at least 5% of the voting rights.

The terms 'trading company', 'holding company' and 'trading group' will have the same meaning as they had for taper relief purposes.

Where an individual qualifies for the relief on a disposal of shares, relief will also be available in respect of any 'associated disposals' of assets which were used in the company, or group’s, business. A similar rule will allow relief on an associated disposal by a member of a partnership who is entitled to relief on the disposal of their interest in the assets of the partnership.

Another HMRC example illustrates this point:

 
If a company director who owns the premises from which the company carries on its business sells the premises at the same time as he sells his shares in the company, the sale of the premises may count as an 'associated disposal' and any gain attract Entrepreneurs’ Relief. The relief due on an associated disposal will be restricted where the asset in question was not wholly in business use throughout the period it was owned.

Trustees will also be able to benefit from the relief if a beneficiary of the trust with an interest in possession relating to those assets is involved in carrying on the business in question, personally or as a partner. In the case of shares, the beneficiary must qualify as an officer or employee of the company in question.

NB These are only proposals at the current time.

Although this “olive branch” to small businesses has been much appreciated, many consider it too little too late. During the recent months businesses have faced considerable uncertainty surrounding their tax liability, making it very difficult for them to plan for the future. Equally with the changes taking effect o n April 6th 2008 there is only just over two months to take steps to mitigate the impact of the changes that are being made.

So Act now!

It is very important that individuals should look at all their assets, consider how the changes will affect them and make a decision as to what to do on that basis. If you have any question or needs some guidance regarding the reforms we would urge you to contact us as soon as possible. You can contact either Sarah Nickols (024 7622 0208) in our Coventry office or Jan Hornby (0121 711 2468) in our Solihull office.