Alastair Darling’s compromise not enough!
Last week, the Chancellor announced a new tax relief for business and property owners known as “Entrepreneurs’ Relief”. Whilst the relief ensures that certain individuals will not be worse off with the introduction of the new flat rate of 18% Capital Gains Tax, many business, land, and property owners could still end up paying more tax.
The new CGT rules
From 6 April 2008 substantial changes to Capital Gains Tax (CGT) will apply to individuals, trustees and personal representatives, but not for companies.
The Finance Act 2008 will introduce the following changes:
- A main rate of CGT of 18% will apply to all gains other than those covered by the CGT annual exemption.
- An effective lower rate of 10% for gains on certain business assets which are covered by the new entrepreneur’s relief. This is due to the way the relief works.
- Capital gains will no longer be taxed by reference to income tax rates and bands.
- The following will be abolished: taper relief, indexation allowance (currently frozen at April 1998), and halving relief, however, in some cases, indexation will not be lost after 6 April 2008.
- Rebasing of cost to 31 March 1982 value will be compulsory for assets held at that date.
- Simplification of the rules for matching certain assets (mostly shares) disposed of with assets acquired.
Entrepreneurs' relief
Although not dissimilar to CGT retirement relief which was phased out in 2002/03, this relief will not be based on any age or illness conditions and the qualifying holding period will only be one year.
- The first £1 million of lifetime gains on qualifying business assets will be charged to CGT at an effective rate of 10 per cent. Gains in excess of £1 million will be charged at the normal 18 per cent rate.
- An individual will be able to make claims for relief on more than one occasion, up to a lifetime total of £1 million of gains qualifying for this type of relief.
According to HMRC’s guidance notes the new relief will apply against:
- Capital gains made when an individual disposes all or part of an unincorporated business or partnership.
- Capital gains made when an individual disposes of assets following the cessation of a business,
- Capital gains made by individuals on the disposals of 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 one in the same group and,
- Owns at least 5% of the ordinary share capital of the company, and is entitled to exercise at least 5% of the voting rights.
A 'business', in terms of this relief will be any trade, profession or vocation, excluding property letting business, (but furnished holiday letting is treated as a trade for this relief).
Draft legislation is expected in the coming weeks for Entrepreneurs' Relief and until then we will have to wait and see if there are any transitional provisions and whether the 'lifetime allowance' starts rolling on 6 April 2008 or is actually from birth.
Employee share schemes
No changes have been announced for “tax advantaged” employee share schemes from 6th April 2008, other than in tax rates.
• All gains made on approved schemes which includes here EMI schemes will be taxed at the flat rate of 18% after deducting the annual exemption (£9,200 2007/08, and set to rise in 08/09).
• Employees who hold less than 5% of the voting capital of their employers companies may lose out due to the loss of the business asset taper relief under the new rules.
• Employees who hold stakes of >5% of shares and voting rights may well be eligible for Entrepreneurs relief.
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Tax Savings 