The announcements
In the Pre-Budget Report (PBR) on 9 October 2007, the Chancellor announced that a single rate of capital gains tax (CGT) at 18 per cent would apply to all gains realised from 6 April 2008 onwards and that the existing indexation allowance and taper relief would be abolished from that date.
In the face of vociferous protest from various sectors, the Chancellor has reviewed the PBR proposals. On 24 January, somewhat later than anticipated, the Chancellor announced that a new relief from CGT, entrepreneurs' relief (ER), would come into force in April 2008, alongside the reforms announced in the PBR. As the name suggests, ER is likely to be of use primarily to people disposing of interests in small to medium-sized enterprises.
Entrepreneurs' relief
The proposed relief will operate to reduce the CGT rate on the first £1 million of relevant gains from 18 per cent to 10 per cent. Any excess will be taxed at 18 per cent. The relief will apply to:
- sole traders or partners selling their business or their interest in a business;
- sole traders or partners, whose business has ceased within the last three years, selling assets formerly used in that business;
- employees and directors selling shares in their trading companies, provided that they own at least 5 per cent of the ordinary share capital of the company and exercise at least 5 per cent of the voting rights in the company;
- employees and directors, who qualify for ER on the disposal of shares in their company, selling an asset used in the company's business; and
- trustees selling assets used in a business, or shares in a trading company, where a beneficiary of the trust with an interest in possession (a right to the income) in such assets or shares is involved in carrying on the business, as a sole trader or as a partner, or is an officer or employee of the company.
For the purposes of ER, a "business" must be a trading business and will include a profession or vocation but will not include a property letting business other than furnished holiday letting. The term a "trading company" will have the same meaning as it currently does for the purposes of taper relief on business assets – ie, it is a company at least 80 per cent carrying on trading activities; "activities" will include engaging in trading operations, making and holding investments, planning, holding meetings, etc.
The £1 million relief will be cumulative for each individual. So an individual will be able to make claims for the relief on more than one occasion, assuming that he/she is within the overall limit. The relief will operate by reducing gains, which are within the prescribed £1 million limit by 4/9ths, which results in an effective rate of 10 per cent.
The draft legislation, which will provide the details on how the relief will apply, has not yet been published.
Issues to consider
The question that is likely to be in the minds of those affected by the announcements in October and January is "Should I take any steps before 6 April 2008?". The answer, unsurprisingly, will depend on the individual's circumstances but there are a few general points to bear in mind.
- Indexation allowance will disappear on 5 April 2008. Even if a sale of the business/assets/shares is not contemplated, is there any scope for "banking" the indexation allowance by making a relevant disposal (for example, a transfer to a family trust)?
- If there is a disposal on the horizon and ER will not be available (for whatever reason) or the scale of the gain is such that ER will not make a significant difference, bringing forward the disposal to before 6 April 2008 could save a substantial amount of CGT.
- The level set for the relief is not particularly generous as you will be looking at an individual's cumulative total of gains over his/her lifetime – the £1million limit is not per transaction. Individuals should consider whether ownership of their business/assets/shares could be shared around the family so as to take advantage of more than one ER.
- Employee shareholders may not qualify for ER (on the basis that they are unlikely to hold a sufficient percentage of the ordinary share capital and voting rights). Employers operating employee share schemes should consider whether they have a duty to advise their employee shareholders of the effect of the announcements.
If you would like advice on any of the issues covered in this briefing, please contact , , , or your usual Mills & Reeve contact.