On 24 January, the Government announced a new relief (“entrepreneurs’ relief”) from capital gains tax (CGT) for gains arising on the disposal of a business.

This is an addition to the CGT reform taking place on 6 April 2008 for individuals, trustees and personal representatives (not companies).

News of the reform was initially announced in the 2007 Pre Budget Report and the following changes were expected:

• Capital gains tax to be charged at a flat rate of 18%.
• Taper relief to be abolished.
• Indexation allowance to be abolished.
• A general rebasing of all assets held at 31 March 1982 so that the market value at that date will be the only value to take into consideration.
• The 50% relief to be abolished for certain gains held over prior to 6 April 1988.
• Simplified matching rules for the disposal of shares.

While good news for some, the announcement of these changes caused consternation amongst the business community, who saw this move as discouraging long-term investment in higher risk investments in private businesses. The main concern was the proposed 80% increase in CGT on the sale of a business with gains now to be charged at 18% rather than an effective rate of 10%.

The more recent announcement on 24 January is in response to these protests and goes some way towards compensating those taxpayers who will be losing business asset taper relief. However, not all taxpayers that would have received business asset taper relief will receive entrepreneurs’ relief. 

Entrepreneurs’ relief

The first £1 million of gains that qualify for relief in an individual’s lifetime will be charged to CGT at an effective rate of 10%. Gains in excess of £1 million will be charged at 18%.

To qualify for relief, the gain must arise on disposal of:

• The whole or part of a trading business (including professions and vocations, but not including a property letting business other than furnished holiday lettings) that is carried on by the individual, either alone or in partnership.

Where a business is not disposed of as a going concern, but simply ceases, relief will be available on gains on assets formerly used in the business and disposed of within 3 years of the cessation of the business.

• Shares (and securities) in a trading company (or the 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
  • owns at least 5 per cent of the ordinary share capital and voting rights of the company.

Relief will also be available in respect of any 'associated disposal' of an asset which was used in the company’s (or group’s) business. For example, 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.

“Trading company” will have the same meaning as it currently does for taper relief and it would therefore appear that AIM listed companies will continue to be included.

It should be noted that the above conditions must have been met for a minimum period of one year before Entrepreneurs’ Relief will apply. This does however mean that some taxpayers will now qualify for the effective rate of 10% a year earlier than under the business asset taper rules.

Draft legislation on Entrepreneurs’ relief, including anti-avoidance measures, will be published shortly.

Training

We will be covering this announcement (and the draft legislation if published in time) and subsequent planning opportunities in our upcoming CPD course “Update – General Tax”. For more details, please click here.

Sharon Cooke 
January 2008