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Turcan Connell response to Capital Gains Tax announcement

Capital Gains Tax Reforms

The long-awaited draft legislation relating to the capital gains tax (CGT) reforms announced in the Pre-Budget Report last October has now been published. The draft legislation confirms the following changes effective from 6 April 2008:

• CGT will be charged at a flat rate of 18% on gains arising from all types of assets realised by individuals and Trustees of UK resident settlements.

• Taper relief, which has the effect of reducing the amount of gain subject to tax and therefore reduces the effective rate at which CGT is paid, is to be withdrawn.

• Indexation allowance (which is frozen at April 1998) and “halving relief” are also to be withdrawn.

• Assets held at 31 March 1982 will be treated as if they had been acquired at their market value on that date. This means that any gains or losses relating to changes in value prior to 31 March 1982 will not be taken into account for CGT purposes.

• The complex rules relating to the identification of CGT base costs of certain assets, principally shares of the same class in a company, will be simplified by treating these assets as forming a single ‘pool’.

• As a consequence of the introduction of the flat rate 18% applying to Trustees as well as individuals, it will no longer be necessary for gains arising to UK resident trusts to be taxed on the settlor where the settlor can benefit from the trust.

Entrepreneurs’ Relief

The Chancellor has also announced that a new form of CGT relief – ‘entrepreneurs’ relief’ is to be introduced with effect from 6 April 2008. This will reduce the 18% flat rate to an effective 10% rate on gains up to £1m arising from the disposal of certain trading businesses, business assets and shares in trading companies. Gains in excess of the £1m threshold will be taxed at the normal 18% rate.

Although the relief is described as similar to CGT ‘Retirement Relief’ which was phased out from 1998, there will be no minimum age requirement as there was for retirement relief. In addition (unlike taper relief) the entrepreneurs’ relief will generally be available where the qualifying conditions for the relief have been satisfied for a period of only one year. 

The relief will apply to gains on the disposal of the whole or part of a trading or professional business (including a furnished holiday lettings business), carried on by an individual alone or in partnership. Where the business simply comes to an end rather than being disposed of as a going concern, the relief will be available against gains on assets previously used in the business, provided these are disposed of within three years of the business ceasing.
 
The relief will also apply to gains on the disposal of shares in a trading company where the shareholder has been a director or employee of the company (or of a company in the same group) provided the shareholder has owned at least 5% of the company’s ordinary shareholding and that holding has entitled him/her to exercise at least 5% of the voting rights within the company.

In addition, the shareholder will be eligible for the relief on gains from ‘associated’ disposals of assets used in the company’s (or group of companies’) business. Similarly a partner in a business who qualifies for the relief will be entitled to relief on the associated disposal of assets used in the partnership’s business. In all cases, the relief on the associated disposal will be restricted where the asset was not wholly used in the business throughout the period of ownership.

Trustees will be entitled to entrepreneurs’ relief where a beneficiary with an interest in possession in relation to the trust assets carries on the business personally or in partnership. Similarly, where the trust asset is shares in a trading company the relief will be available where the eligible beneficiary is an employee or director of the company concerned.

Our advice

The package of reforms, combined with the new entrepreneurs’ relief, means that many clients may be forced to make important decisions as to the timing of disposal of business and non-business assets. Potentially the tax rate on certain gains will be higher if the gains are realised on or after 6 April 2008, whereas for other gains the tax rate may be lower if realised on or after that date.

It is therefore essential that individuals and Trustees take advice as to the timing of disposals to maximise the benefits of the new allowances.

If you would like advice or further guidance on this matter, please speak with your dedicated Turcan Connell contact or telephone Ian McGowan, Director of Tax Services, on 0131 228 8111.

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