The Chancellor has confirmed that the changes to the Capital Gains Tax (CGT) regime, announced in the Pre-Budget Report 2007, will go ahead from 6 April 2008. The key changes which include the abolition of Business Asset Taper Relief (BATR) and indexation relief, and the introduction of a flat rate of CGT of 18%, mean that, from that date, the rate of CGT on business assets will increase by up to 80% for many taxpayers and by very much more for those taxpayers making relatively small gains.
Following much lobbying from industry bodies, the Chancellor has announced one concession: an entrepreneurs’ relief which will reduce the effective rate of tax to 10% on the first £1million of cumulative qualifying gains.
This is clearly a valuable relief for many taxpayers, with gains of £1million or less. However, many gains will still be taxed at 18% going forward, with gains themselves potentially higher as a result of the abolition of indexation allowance.
Entrepreneurs’ Relief
This new relief will take effect from 6 April 2008, and will mean that an effective CGT rate of 10% will apply to up to £1 million of gains made on the disposal of trading businesses carried on by individuals (or trustees) alone or in partnership, of shares in qualifying unquoted trading companies and of assets used in such trades. The £1 million is a lifetime limit, but it may be increased in later Finance Acts. ‘Trading’ has exactly the same meaning for Entrepreneurs’ Relief as it has for BATR. Several new features were announced the Budget, some good, some bad.
Firstly, some bad news: the definition of a qualifying company has been narrowed. It will now be necessary for the individual to be an officer or employee of the company and to hold at least 5% of the equity and of the voting rights in it throughout a period of one year. This will exclude many business angels and venture capitalists and most AIM investors. Generally, the one-year period is that ending on the date of disposal (but see below re. cessation of business). It will therefore be very important to pay careful attention to the timing of any sale – and the date of sale for tax purposes is not always as might be expected.
And some more bad news: where an asset is used by an unquoted trading company it now qualifies for BATR, but it will only qualify for the new Entrepreneurs’ Relief if it is disposed of by an individual at the same time as shares in that company are disposed of by the same individual and the new relief applies to that share disposal. It is not clear, at this stage, whether the individual has to sell all his shares at that time or only some of them, but it has to be as part of his withdrawal from the business.
Now for some good news: if the qualifying business carried on alone or in partnership ceases, or if the qualifying company ceases to trade, the new relief is still available if the conditions were satisfied throughout the one year period up to the date of cessation and the sale takes place within 3 years of that date.
Trustees can also claim Entrepreneurs’ Relief, but only if a qualifying beneficiary has a qualifying interest in the business in question – fairly complicated definitions apply but at least there is clarity. The trustees and beneficiary must make a joint claim and any relief obtained by the trustees will reduce the individual’s lifetime limit of £1 million.
Preserving indexation
For some individuals who held assets before 6 April 1998, indexation allowance may be of significant value, for example:
- farmers and landowners who owned land at 31 March 1982; and
- owners of chattels with a high value at 31 March 1982.
Where an individual is unlikely to hold such assets through to death, it may be worth considering taking action before 5 April 2008 to preserve indexation allowance, for example:
- by transferring the asset to the owner's spouse on a no gain/no loss basis; or
- where an asset is jointly owned or the individual does not wish to pass the asset to his/her spouse, by selling or gifting the asset to a trust. In such cases, the Stamp Duty Land Tax and Inheritance Tax implications must be taken into account.
Particular issues may arise, for example, if the asset was owned before 31 March 1982, if there has already been a transfer between spouses of an asset held before 31 March 1982, or if the spouse to whom the asset is transferred is not domiciled in the UK.
Loan notes
Where an individual has deferred a gain into a qualifying corporate bond (QCB) (ie the gain is deferred until the disposal of the QCB), the disposal of that QCB after 6 April 2008 may qualify for entrepreneurs’ relief. We understand that the relief will be available on the redemption or disposal of QCBs from 6 April 2008, provided the original disposal would have met the conditions for the relief to apply (see above).
If after 6 April shares are exchanged for standard loan notes, which are generally QCBs, the gain frozen into the QCB will be calculated after any entrepreneurs’ relief that would have been available at that time. Where shares in the target company are exchanged for shares in the acquiring company or for non-QCBs, issued by the acquiring company, the current rules usually deem there to be no disposal of the old shares and for the new shares/securities to be treated as having been acquired at the same time and for the same price as the old shares.
The entrepreneurs’ relief might not be available on a sale of the new shares/securities because the necessary conditions are not satisfied – the 5% test, the employer/officer test or the trading company test. The new rules will allow the individual to elect to pay the tax at the time of the sale of the old shares and hence become entitled to the new relief if the necessary conditions are satisfied at that time. Whilst this means tax is paid earlier, the amount may be substantially lower.
Domicile and Residence Issues
Substantial changes to the UK tax rules for non-UK domiciled, UK resident individuals, have been announced and will take effect from 6 April 2008. These changes will impact on both income tax and capital gains tax, and must be considered in detail.
One key issue will be that of stockpiled gains. Recipients of capital payments under the offshore trust regime (stockpiled gains) will pay CGT at an effective rate of no more than 28.8% from 6 April 2008 (currently 64%). Such individuals may therefore wish to consider delaying returning assets to the UK until after 5 April 2008.
Act Now
There is now only a very short period of time before the new rules take effect on 6 April 2008. It is essential that you seek appropriate professional advice now to understand how the changes will affect you and to take any action necessary to maximise the reliefs and allowances available to you now and in the future.
Please contact Brian Williams or Paul Belsman for further information.