Page last updated at 15:27 GMT, Thursday, 24 January 2008

Tax changes offer partial relief

Money Talk
By Penny Bates
Menzies chartered accountants

Penny Bates
Penny Bates, tax partner at Menzies
We have been anxiously awaiting for more details from the Chancellor about his proposal to levy a flat rate of capital gains tax of 18% since the pre-budget report in October 2007.

With 6 April 2008 fast approaching - and despite being promised further announcements on at least two occasions - nothing had been forthcoming until now.

The proposals announced last October included the abolition of taper relief which was very valuable, particularly for business assets eg shares in a family trading company, where the effective rate of tax can be as low as 10%.

Even for non-business assets, eg a second property, the rate can be as low as 24% rather than the 40% payable by a higher rate taxpayer without the benefit of this relief.

For a basic rate taxpayer, the effective rates of tax for business and non-business assets are even lower.

Pressure from the accountancy profession and industry groups has now led the chancellor to announce a small relaxation of the rules.

With effect from 6 April 2008, a lifetime lower rate of CGT will apply at 10% in respect of the first 1m of cumulative gains arising on disposal of trading businesses, and in respect of certain disposals of shares in trading companies.

Thereafter, all such gains will be taxed at the new flat rate of 18%.

Winners and losers

Looking at a traditional businessman - someone who has built up his small business throughout the course of his working life - there will be an advantage under the latest proposals.

Entrepreneurs contribute greatly to UK Plc by their innovative businesses, employing many people and swelling the Treasury's coffers

Take, for example, a newsagents', where the owner has worked in, and built up, that business over the last 30 years or so.

He will probably sell that business on retirement for less than 1m and therefore be able to take advantage of the 10% tax rate. Therefore, he will be in no different a position than under the current rules.

Entrepreneurs are a different matter.

When taper relief was introduced in 1998, it was precisely these people that Gordon Brown sought to incentivise with a benign tax regime for business disposal.

It was recognised that there are a number of businessmen who start, develop and sell several businesses during their lifetime.

Such entrepreneurs contribute greatly to UK Plc by their innovative businesses, employing many people and swelling the Treasury's coffers.

I see many clients in exactly this position - successfully developing businesses and taking the risk that attaches to that.

Sometimes the businesses fail with financial loss, but on many occasions the entrepreneur builds a valuable business.

These innovative businessmen will now pay a flat rate of 18% on gains of business assets with relief on the first 1m of only 8%, bringing the rate down to 10%.

Lack of certainty

In the current business and technological environment, it is very possible for many types of businesses to be located anywhere in the world.

The continued procrastination and lack of detail being offered by the chancellor is irritating, both for businessmen and those advising them

Are we therefore at risk of losing out? Will our successful entrepreneurs opt to leave the UK as a result of this effective 80% increase in capital gains tax?

As yet, there is little detail available in respect of this latest announcement.

The value of the lifetime limit of lower rate capital gains will erode over time - will it be indexed in some way?

What about those business people who entered into deals that deferred proceeds on a previous (recent) sale - will they get the advantage of the new lower rate of 10%?

It is hoped that draft legislation will be available soon to answer these questions.

In the meantime, we are still in a tricky position, as the rules will not be known in their final form for some months.

The continued procrastination and lack of detail being offered by the chancellor is irritating, both for businessmen and those advising them.

This has led to business people making decisions biased more towards mitigating tax than would normally be the case.

The chancellor's latest announcement has failed to address the main issue.

While the traditional businessman building up one business throughout his working life will benefit, the serial entrepreneur's benefit is very small.

It was precisely these people who were originally incentivised by the introduction of taper relief in 1998.

They are still being penalised for that effort.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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