Last October the government announced some major changes to capital gains tax (CGT) for individuals and trustees, but not companies, for 2008/09. These include, for disposals and held over gains arising on or after 6 April 2008:
The annual exemption remains and for 2008/09 this is £9,600 for each individual. This exemption allows the first element of gains for each individual made in a given tax year to be exempt from CGT.
The Chancellor has also introduced a new relief with effect from 6 April 2008 so that some business owners will continue to have the potential benefit of a 10% rate of CGT.
After business leaders voiced their objections to the abolition of taper relief, the Chancellor has introduced a new Entrepreneurs’ Relief (ER). ER may be available for disposals, reorganisations and relevant transactions taking place on or after 6 April 2008.
The main effects of this relief are:
The new relief is similar to Retirement Relief, which was phased out with the introduction of taper relief, but under the new rules:
ER - impactThe effect of the relief is to reduce the gains liable to CGT at 18% by 4/9ths, resulting in an effective rate of 10% (18% x 5/9ths). The relief will be available for gains of up to £1m for qualifying disposals by an individual throughout their lifetime. The impact of this new relief on qualifying disposals can be seen in the following table (ignoring the annual exemption). |
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| Gain | Qualifying for ER | Amount of ER | Chargeable gain | Tax | Effective rate | ||
| 250,000 | 250,000 | 111,111 | 138,889 | 25,000 | 10% | ||
| 500,000 | 500,000 | 222,222 | 277,778 | 50,000 | 10% | ||
| 750,000 | 750,000 | 333,333 | 416,667 | 75,000 | 10% | ||
| 1,000,000 | 1,000,000 | 444,444 | 555,556 | 100,000 | 10% | ||
| 1,250,000 | 1,000,000 | 444,444 | 805,556 | 145,000 | 11.6% | ||
| 1,500,000 | 1,000,000 | 444,444 | 1,055,556 | 190,000 | 12.7% | ||
| 1,750,000 | 1,000,000 | 444,444 | 1,305,556 | 235,000 | 13.4% | ||
| 2,000,000 | 1,000,000 | 444,444 | 1,555,556 | 280,000 | 14% | ||
| 3,000,000 | 1,000,000 | 444,444 | 2,555,556 | 460,000 | 15.3% | ||
| 4,000,000 | 1,000,000 | 444,444 | 3,555,556 | 640,000 | 16% | ||
| 5,000,000 | 1,000,000 | 444,444 | 4,555,556 | 820,000 | 16.4% | ||
The relief may apply to gains arising on the disposal of:
A trading business includes professions but only includes a property business if it is a ‘furnished holiday lettings’ business. 'Trading company' has the same meaning as applied for taper relief.
Similar rules operate where the trustees of a settlement make a disposal of business assets and there is an individual who is a qualifying beneficiary. There are however a number of specific conditions which need to be met to treat the individual as a qualifying beneficiary.
ER will have to be claimed by the individual or, in the case of a disposal of trust business assets, jointly by the trustees and the qualifying beneficiary.
Where a claim is made, gains and losses of all relevant disposals are to be aggregated and any remaining ‘net gain’ reduced by 4/9ths. This rule applies to both individuals and trust gains in respect of qualifying beneficiaries. The maximum cumulative ‘net gain’ qualifying for the reduction cannot exceed £1m.
ExampleWilliam sells his shares in a trading company in 2008/09 and realises a gain of £460,000. He has been a director of the company and has owned 45% of the ordinary shares of the company (which gave him 45% of the voting rights) for six years. He therefore qualifies for ER on the disposal of his shares. On making a claim, William's gain is reduced by 4/9ths, resulting in a chargeable gain of £255,555. Assuming William has no other gains or losses, after deducting the annual exemption of £9,600 he has a chargeable gain of £245,955. This amount is taxed at 18%, giving CGT due of £44,271. |
Commercial property has enjoyed a favourable status under taper relief rules and there has been a strong argument in favour of keeping property ownership in the hands of individuals rather than in a company.
The abolition of taper relief may mean a significant increase in the CGT bill on the disposal of commercial property. The introduction of ER will not do much to reduce the problem. The only situation in which ER will generally be available on the disposal of commercial property will be by means of an ‘associated disposal’.
This means that the sale of assets used in a partnership or by a company but owned by an individual will only qualify for relief if the assets disposed of are ‘associated’ with the withdrawal of the individual from participation in the partnership or the company.
No ER will be available on the disposal of property which previously qualified for business asset taper because the property was let to another trader or an unconnected trading company.
A number of individuals made gains prior to 6 April 2008 and have deferred the gain until after 5 April 2008. ER may be available when the deferred gain eventually becomes chargeable after 5 April 2008 if the original sale of shares in a trading company, or the sale of an unincorporated business, would have met the conditions for ER if ER had been available at the time of the original sale.
The deferred gains eligible for relief are where:
ExampleNicola sold her trading business in June 2006 and realised a gain of £280,000. She invested this amount in qualifying EIS shares in August 2006 and the gain was deferred. In October 2010 she sells her EIS shares and the deferred gain of £280,000 becomes chargeable. If the gain on the sale of her business in 2006 would have qualified for ER if ER had been available at that time, then ER will be due. Nicola can claim ER against the deferred gain. This would reduce the deferred gain by 4/9ths, leaving a chargeable gain of £155,555. |
If an individual had shares in a trading company which were disposed of in exchange for loan notes in another company which are not QCBs, there may be ER on the disposal of the loan notes after 5 April 2008. However, the loan notes would need to be issued by a trading company in which the individual owns at least 5% of the shares and voting rights in that company and the individual is an officer or employee of that company.
Whilst the introduction of ER goes some way to mitigating the loss of taper and indexation relief, the Chancellor’s plan for a simple tax system has evaporated.
Considerable care will be needed in planning to obtain the benefit of ER. There are a number of traps for the unwary. These include the following areas:
As ever, tax is not straight forward. If you would like to discuss ER in detail and how it might affect your business, please do get in touch.
This briefing is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this briefing can be accepted by the authors or the firm.