Capital Gains Tax (CGT) - What's changing from 6 April 2008

The Chancellor of the Exchequer last week announced a new "CGT entrepreneurs' relief". Whilst many are heralding this as a U-turn, the Treasury's official line is that it is merely complementing the CGT reforms announced in the Pre-Budget Report last October.

HMRC have not yet issued draft legislation or explanatory notes on this new relief, therefore the following is based on the press releases that were issued yesterday, but it should be remembered that until the legislation receives Royal Assent it could change.

The new entrepreneurs' relief

Is to take effect from 6 April 2008.

Will apply to owners of:

• trading businesses such as a sole trader and partners in a trading partnership;
  
• shares or securities in a trading company (or the holding company of a trading group) provided they
  - own at least 5% of the shares and are able to exercise at least 5% of the voting rights in the company; and
  - have been employees, directors or other officers of the trading company or group;
  
• "associated assets" used in a trading business (e.g. if a qualifying company shareholder or partner in a partnership owns the premises from which the company/partnership trades and sells the premises at the same time as he sells his shares in the company or his partnership share, the premises may count as an associated asset and any gain attract entrepreneurs' relief).

Logically, this would extend to a situation where the associated asset is disposed of at any time before the individual sells their shares/partnership share (e.g. the business trading premises owned personally are sold to allow new bigger premises to be bought), but currently there is no comment on that situation.

The definition of 'trading company', 'holding company' and 'trading group' will have the same meaning as they currently do for taper relief on business assets.

Trading businesses will include professions and vocations, but not property letting businesses other than furnished holiday lettings.

The relevant conditions must generally be met for a period of one year. Whilst there is currently no clarity on this, it would be logical for ownership periods pre 5 April 2008 to be taken into account.

Where the relief applies CGT will be charged at an effective rate of 10% on the first £1 million of lifetime capital gains with any excess being charged at the 18% CGT rate. The way this will be calculated is to reduce the qualifying gain chargeable to CGT by 4/9ths.

Claims for the relief can be made on more than one occasion, up to the lifetime allowance of £1m. Although the press releases do not mention it, it is understood that the £1m lifetime allowance will only include gains arising on or after 6 April 2008.

Trustees can also take advantage of the new entrepreneurs' relief on gains on assets used in a business. To qualify for the relief a beneficiary of the trust with an interest in possession relating to those assets must be involved in the business, either as a sole trader or as a partner and, in the case of shares, the beneficiary must be an officer or employee of the company. The £1m lifetime allowance will apply to the trustees and the qualifying beneficiary jointly.

In contrast to business asset taper relief, HMRC have indicated that employees or directors who own less than 5% of the shares in a trading company will not be eligible for the new relief. Representations are being made to try and rectify this apparent error, so if you are in this position watch this space.

In the Chancellor's speech he made reference to 'retaining tax advantaged share schemes' e.g. Enterprise Management Incentives, indicating that the entrepreneurs' relief will be available here. It does not categorically say that though, and many option holders will hold options over less than 5% of the shares, and therefore not meet this new condition.

Changes already announced

The latest announcements do not alter the CGT changes announced in the Pre-Budget Report and the new legislation concerning the entrepreneurs' relief will simply sit alongside them rather than replace or amend anything:

The major changes already announced in the Pre-Budget Report are:

• the start date for the new 18% CGT rate, which remains at 6 April 2008;
  
• the abolition of taper relief;
  
• the abolition of indexation allowance for individuals and trusts. Indexation relieves inflationary gains arising between March 1982 and April 1998 from tax;
  
• the individual annual exemption currently, £9,200.

Conclusion

Whether the new entrepreneurs' relief is a U-turn or not, it is welcome news for many and does show that the Government has been listening to representations from small business groups and other interested parties. We will keep you advised once draft legislation is issued.

Anyone owning assets relating to a business will need to consider how the new proposals will impact on them.

For further information on this press release, please contact:

Nick Haines
Tax Director
nmh@hazlewoods.co.uk

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