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CGT reform: Relieve me, I'm an entrepreneur. By Simon Sweetman

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24th Jan 2008
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All things considered, Simon Sweetman is quite pleased that the Chancellor has changed his mind about CGT

The Chancellor has bowed to public pressure and added an “entrepreneurs’ relief” to his CGT proposals. My main quibble is that “entrepreneurs’ relief” sounds like something that happens in a massage parlour, and advocates of tax simplification will note that this adds about 8 pages of legislation, and we really can’t blame HMRC or the government for this. Reliefs equal complexity.

So the first £1 million of gains on – loosely – the sale of a business or shares in a business will be taxed at 10% instead of 18% (well, strictly speaking no : the gain is reduced by 4/9 before being taxed, which is better for small disposals and not so good for larger ones). This applies to:

  • The disposal of all or part of an [unincorporated] business
  • The disposal of assets following the cessation of a business
  • The disposal of shares in a trading company where the disponor was an officer or employee and held at least 5% of the shares.

While it bears a resemblance to our old friend retirement relief, the qualifying period will normally be only one year. And it applies to furnished holiday lettings (a potentially nasty loophole, that one).

This fully compensates small businesses (as I understand small business) and to some extent the legendary serial entrepreneurs for the loss of business taper relief after 5 April. It does not necessarily make up for indexation relief and where that is important (that is, where a business has been owned for a long time and the base cost was significant) there may still be the need to arrange some kind of disposal now (perhaps to a spouse). In my view, though, we now have a substantially better CGT system than we did last year.

So the good news is that the Chancellor has listened to what people said to him and responded : which perhaps emphasises that it would have been much better had he listened first and shot afterwards. However, the harm is undone.

But what this is really about is how to react. The new relief resembles quite closely the proposals put to him by the Federation of Small Business - FSB (no, not the Russian secret police this time), so the FSB couldn’t really complain. Except of course about what went before, saying We welcome these plans, but the way in which the whole issue has been handled has seriously eroded small businesses’ trust in the Government. There has been huge uncertainty about what small businesses’ tax liabilities would be from April 2008 and this has made planning for the future very difficult. Even now small business owners have very little time to prepare before these new changes come in.

Now let’s unpick the rhetoric here. First of all, nobody reading FSB press releases over the last few years would have thought that small businesses had any trust in the government to be eroded. Unquestionably the time span on this will have meant that some small businesses made what are now unnecessary arrangements to bank their taper relief (tax-driven incorporations, perhaps). But is there a problem now? Small business owners on the whole do not sell businesses at regular intervals: they do it once or twice in their working lives. We have something close enough to the return of retirement relief to keep us happy.

Now lots of people will jump up and down and shout “u-turn”. That seems to me to be very unhelpful. It was J M Keynes who said When the facts change, I change my mind (pause for those of you who equate Keynes with the Great Satan) and I think we should actually be pleased with a politician who can be persuaded that his first shot at something is wrong. Indeed Keynes also said There is no harm in being sometimes wrong — especially if one is promptly found out. And, of course, if one is prepared to admit it.

So – in the end – applause for the Chancellor who has been prepared to listen.

Useful links
News items: Darling announces major CGT relief

Features:
The new CGT regime Nichola Ross Martin summarises the main changes proposed to-date.
Comparison of CGT different disposals 2007/08 v. 2008/09 The winners and losers.

Link to HMRC guidance:
Draft CGT legislation
Entrepreneur's relief

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Replies (5)

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By User deleted
05th Feb 2008 15:14

Thank You
Rebecca, thank you for your clarity.

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
04th Feb 2008 21:07

You may want to go now
There will be no taper relief, and the new entrepreneurs' relief is only available on assets where either the business has ceased or the business has been sold and the asset was owned by a partner or shareholder who has disposed of his interest (the old fashioned associated disposal rule). So no relief for the sale of a property used in the business which continues. Although roll over relief may be available to mitigate some of the gain if you are trading down.

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By User deleted
04th Feb 2008 16:56

Sale of business asset
Can someone clarify what the position will be after 5th April 2008 for sale of business asset, but no sale of business? I have a specific situation where client had planned to sell, what is due to become, surplus (smaller) buildings (not sale of a part of the business).

May have to consider whether there is a need to crystallise a gain prior to 5th April.

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By NeilW
27th Jan 2008 19:23

But ulitimately foolish
The only fair system is to implement CGT for individuals as it is for companies. Indexation and then taxed at marginal rate. Any other system is open to shifting.

I can think of two belters not including the 'Holiday in sunny Suburbia before I sell my BTL' one that is doing the rounds at the moment.

Will they never learn.

NeilW

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By andymeeson
25th Jan 2008 15:14

Fully compensates for loss of taper? I think not
"This fully compensates small businesses (as I understand small business) and to some extent the legendary serial entrepreneurs for the loss of business taper relief after 5 April."

Allow me to differ. I'm not convinced that the newly-announced "entrepreneur relief" does "fully compensate" for the loss of taper. The assertion that it does is dependent on the unstated assumption that there is no annual exemption available.

Take a pre-5 April 2008 example. Gains are £36,800. Taper removes 75% of this from charge, leaving £9,200 which is entirely covered by exemption.

Post-5 April 2008: Gains again £36,800. Entrepreneur relief removes 4/9 of this from charge, leaving £20,444. After exemption (assume same as before), we have £11,244 taxable at 18%.

So, an entrepreneur with relatively minor gains sees a nil tax liability rise to over £2,000 while supposedly facing the same "effective" 10% rate of tax....

Virtually all the debate on the proposed 18% rate, and now the entrepreneurs' 10% rate, has ignored the effect of the exemption.

This is surely wrong, as in my experience very few clients will not have an exemption available against sales of business assets. After all, where else would they use it? For most individuals other than buy-to-let landlords, the only thing they ever sell which ends up subject to CGT is their business. What are the alternatives: cars (exempt); home (exempt); chattels (exempt); quoted shares (in the ISA).... In my view, every comparison of CGT regimes for the disposal of shares should take account of the effect of the exemption, and on that basis none of the alternatives prove to be as favourable as business asset taper.

On a related subject, what about shareholdings split between husband and wife? It's not clear from the information out so far, but it looks as though a shareholding spouse who doesn't work in the company would qualify for the £1M relief. Which further skews this new measure away from fully restoring the benefits of taper...

To conclude, the headlines sound good, but the removal of taper is still a blow to the entrepreneur, and disproportionately so for ones with relatively small levels of gain.

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