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CGT Reform: Retirement relief resurfaces

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1st Nov 2007
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The Chancellor has decided to reintroduce a new form of CGT retirement relief. This follows outcry from business groups on behalf of those who are selling their businesses and going to be adversely affected by the 80% tax increase created by CGT reform announced in last month’s Pre-budget Report and effective from 6th April 2008.

The move, which is understood may exempt the first £100,000 of any chargeable gain on retirement, is expected to be followed by packages of further measures to encourage investment and enterprise once the Treasury finished consulting on its CGT proposals.

Opposition to the Chancellors plans for CGT reform in the form of a flat rate tax of 18%, and the scrapping of indexation and taper relief for disposals by individuals have been gathering pace since the PBR. When the dust settled following the announcement it was realised that the business entrepreneurs and the AIMs market would be hit hardest, whist the biggest group of beneficiaries would be short term speculators and the buy-to-let market.

The scrapping of taper relief has a further sting in the tail for those who have sold an existing business in exchange for QCBs too, if these are redeemed post 6th April 2008 the taper relief attaching is lost. Some tax professionals are querying the need to reform business taper relief in its present form at all. One suggestion is that a new business taper relief should apply from 6th April, based on the two year holding rules for SME and AIMs investors. Whilst others have queried whether the real solution should have been to tax Private Equity in another form.

Stephen Herring, Tax Partner, BDO Stoy Hayward comments:
'Clearly many small businesses will welcome the Chancellor’s climb down from the original PBR Proposals which would have increased the capital gains tax liabilities on the sale of a family business. It should be emphasised, however, that the maximum savings on the basis of what has been shared with the Press would amount to just £18,000 or, only £900 per annum for a business which has been carried on for twenty years before the proprietor’s retirement.'

'Tax advisers will be hoping that this does not become a relief which captures some headlines for a few days but is constrained by complex and judgmental criteria before HM Revenue & Customs accept that a disposal qualifies for exemption. Hopefully, the Chancellor will instruct HMRC to draft legislation which extends to all family business disposals including shares and assets and does not require a Schedule containing six or seven pages of complex tax law and additional explanatory guidance.'

Many commentators are unsurprised to find that the Chancellor has had to change track following the surprise announcement, a similar thing happened with the FA 2006 changes to trust taxation. Consultation ruins political surprises but it does at least ensure that that measures that are consequently proposed have been thoroughly thought through.

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By NeilW
01st Nov 2007 13:06

The best way to encourage entrepreneurship
The best way is to get the hell out of the way of entrepreneurs and let them do what they do best.

The sooner government realises that it can do nothing to encourage enterprise the better. It can close down its initiatives and use the money saved to reduce the *real* problem cost in the economy - secondary class 1 NIC and employment regulations both of which stop jobs being created.

Plus all those redundant quango employees can be used in the real economy to create real wealth - rather than living in some Keynesian fantasy as they do at present.

In an increasing service economy capital investment incentives are misplaced. We just need something fair, reasonable and easy to understand.

NeilW

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By Robert Hurn
05th Nov 2007 13:59

Taper relief needs changing
I agree with John CGT incentives should be used to encourage the retention of assets. BTR in its current form encourages the churning of business assets bi-annually. Whilst BTR is very nice when preparing a clients CGT computation, it is very hard to justify 75% taper relief after just 2 years of ownership. personally i would be in favour of 75% being available after 10 years, with a higher ratio upon retirement.

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By AnonymousUser
05th Nov 2007 15:06

Why do people think...
... it is a good/bad thing for the tax system to encourage/discourage retention of business assets?

Wouldn't it be better if the tax system was neutral as regards length of retention? Then the decision to sell or retain would be made on business grounds alone.

It is surely better if the tax system does not distort what should essentially be a business decision one way or the other.

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By User deleted
02nd Nov 2007 09:50

Praise and Complain
I'm the last persron to praise this Government and it's taken them 10 years of 'sound-bite' policy making, but it does seem as though we may have turned an important corner here.

It can't be easy to dilute announcements only recently trumpeted in the PBR, so well done Captain for swallowing your pride and seeing sense.

I'm glad we've all used these web pages to good effect and that the CBI and FSB have successfully represented us. I'll look forward to learning of the new £250,000 business retirement relief :o)

http://petitions.pm.gov.uk/list/open?cat=692

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By asfossey
05th Nov 2007 17:23

At last the Wolf has shed its' Sheep's Clothing!!!!!
I suppose one good thing (if it can even be considered as such) is that we can better understand what the Labour Government feel about the idea of encouraging owner/employee investment in the companies they own or work for.

It is quite hard to take seriously their words down the years about wishing to encourage this, when they turn and one fell swoop and undo any good work that Taper Relief did in that arena. For sure, we can argue about the speed with which it ramps up to an effective 10% tax rate, but the fact that it encourages people to hold, rather than summarily dispose of investments, works to a degree against short-termism, and so is good isn't it? I am not sure I hold to a view below of a 10-year ramp-up. Markets and M&A activity moves with such speed nowadays, that what felt like a 10-year investment 2 or 3 years ago, could now turn into an ideal opportunity not to be missed, by the majority shareholder! Perhaps 5 is more sensible, but I am not even sure that, on its own, that produces a fair result in all situations.

For example, if an early disposal were to crystallise a CGT liability, as the shares previously owned in the company were sold as the company changed hands, but the original owner of the shares (eg an employee), were offered shares in a new acquiror's company, wouldn't some kind of "rollover" provision be more equitable, and act as an incentive for the employee to stay with the incoming purchaser? Conversely, why should the employee, who is (probably) not in control of the process suffer a CGT liability at a time chosen by the majority shareholder, and which may be years earlier than originally envisaged. Shouldn't CGT seek to charge the individual as they "exit" a series of "linked" and sequential transactions, and not tax the first, "forced" disposal?

The idea of some kind of "retirement" relief merely acts to provide a positive incentive to people to exit the equity ownership arena, where they may otherwise have been perfectly keen and able to continue?

For what its worth, I think the chancellor has jumped too quickly and created a very blunt sword to deal with what many may have agreed was a bit of a "patchwork quilt" of issues on CGT.

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By deltic1
06th Nov 2007 19:12

with the new proposals are we only one step away from cgt going

then back will come paye and income tax over a much wider range of income tax bands and values etc
+ everyone over a certain income / paye having to submit a tax return
+ the self employed etc as present etc

like wise business and council tax rates
over far more bands and a wider range of rateable values.

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