It has been like getting blood out of a stone, but at long last Alistair Darling has finally revealed his new CGT rules for individuals and partnerships (and also trustees) that come into play on 6 April 2008.
The Chancellor has confirmed that he will go ahead with introducing a new flat rate of tax of 18% for capital gains. However, he has listened to the lobbying from small businesses and has announced a new relief (entrepreneurs’ relief) that will mean that most small business owners will still be able to qualify for a maximum tax rate of 10% on the sale of all or a part of their business.
Many commentators had predicted that any concession from the Chancellor would be based on the old retirement relief rules that were phased out some while ago. To a certain extent the new relief is more generous because there is no requirement for the individual to be aged 50 or over at the time of sale. Furthermore, in relation to a sale of shares, there is no need for the individual to have been a full time working director or employee of the company (in the past this was generally held to be at least 25 hours work per week). All that is required under the new rules is that the individual is an employee or director of the company – the number of hours worked is irrelevant (naturally the other qualifying conditions will still have to be met e.g. the company has to be a trading company).
The other pleasant surprise is that in order to qualify for the new relief the asset can be owned for as little as just over one year, whereas with the old retirement relief rules the business had to have been owned for 10 years to fully qualify for relief (even with the current taper relief rules, the business has to have been owned for at least two years to qualify for the 10% tax rate).
One real positive outcome of the Chancellor’s announcement is that a relatively large number of individuals will pay the same amount of tax irrespective of whether they sell their assets pre or post 5 April 2008. Prior to the announcement, many businesses were fearful that they would incur a tax rate of 18% post 5 April 2008 and have therefore been considering tax planning action to crystallise a “disposal” in this tax year (so as to lock into the current 10% tax rate). Whilst some individuals will still have this problem (e.g. because they will not qualify for the new entrepreneurs’ relief), the numbers will be much smaller than was previously the case.
So what are the downsides with the new rules?
The draft legislation for the new entrepreneurs’ relief will not be published until mid-February, so until then we cannot be certain of all of the implications of the new rules. The information released by the Government so far indicates the following main downsides:
- IIndexation Allowance will be abolished. This will particularly affect the farming community where land has been owned for many years. Inter-spouse transfers may be appropriate in certain circumstances to effectively “bank” the relief that has already accrued.
- The new entrepreneurial relief will have a lifetime limit of £1 million per qualifying individual, which will mean that very successful entrepreneurs will pay significantly more tax. Individuals with businesses that are pregnant with capital gains in excess of £1 million may wish to consider pre 6 April 2008 planning action.
- Shareholders having less than 5% of the company (e.g. participants of an employee share scheme) will not be eligible for the new relief.
- Commercial property owners who rent their premises to third parties will no longer be eligible for the 10% tax rate and may therefore wish to consider crystallising a disposal prior to 6 April 2008 so as to lock into the 10% tax rate that they currently enjoy. In addition, it may be prudent for individuals who own their business premises personally (i.e. separate from their trading partnership or company) to also consider this action.
If you would like to discuss these important CGT changes in more detail, please contact one of our tax partners; Valerie Fisher, Dean Johnston or Bevan Osgood. |
