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Relief systems: the chancellor has indicated that he proposes to improve the rate of business asset taper relief, but Trevor James explains the many reasons why the true situation is rather more complicated than this. (Tax).

Taper relief reduces the amount of the gain chargeable to tax. The level of relief depends on the type of asset you hold. The longer you hold the asset, the greater the relief. The relief works for whole years of ownership. Assets are divided into two classes: business assets and other assets. The rate of relief is significantly accelerated for business assets, as demonstrated in the table (below).

The chancellor has indicated that he proposes to improve the rate of business assets taper relief (BATR) from 6 April 2002, so that the 10 per cent rate is achieved after two complete years of ownership. The chancellor is also considering amending the non-business asset regime. The definition of business assets has been progressively relaxed by the 2000 and 2001 Finance Acts. However, the Finance Act 2000 changes were not retrospective, so you must look at both sets of rules and, where the status changed as a result of these amendments, an apportionment is required.

Current rules are that business assets include:

* any shareholding in an unquoted trading company;

* any shareholding of an employee in a quoted company. An exception is that employees with a material interest (greater than 10 per cent when aggregated with the holdings of "connected" persons) of any class of shares have to hold shares in a trading company;

* a 5 per cent-plus shareholding in a quoted trading company (where the holder is not an employee).

For these purposes unquoted shares includes those listed on the Alternative Investment Market (AIM).

You need to check that the asset you are dealing with qualifies under the legislation--there are potential hurdles. The first question when employee shares are involved is whether you are in the capital gains tax regime, or could the surplus be taxed as income and also potentially suffer national insurance? Problem areas include:

a. convertible shares (rachets are atypical problem area);

b. conditional shares anti-avoidance legislation;

c. dependent subsidiary legislation;

d. disqualifying events for EMI purposes.

This area of tax law is difficult and many individuals face a tax and NIC charge of up to 47 per cent. The legislation is full of precise definitions which you need to fit in order to qualify. The Inland Revenue's Tax Bulletin, June 2001, provides more guidance. Areas to watch include:

a. Securities--taper relief applies to securities as well as shares. Loan notes are often issued on an acquisition of a company. These can either be qualifying corporate bonds, which effectively freeze taper relief entitlement at the date of the transaction, or non-qualifying corporate bonds, which allow you to increase your qualifying taper relief period, provided you meet the other conditions. The choice of security depends on the circumstances. The Inland Revenue's view is that not all loan notes will qualify for the purposes of BATR; the following are needed:

* they must be held as an investment;

* they must have the ability to be realised at a profit;

* they must have a structure of permanence;

* they must be able to be marketable to third parties.

b. trading company--this is defined as: "a company existing wholly for the purpose of carrying on one or more trades, or a company that would fall within that definition apart from any purposes capable of having no substantial effect on the extent of the company's activities".

There are many traps for the unwary in the Revenue's definitions of these terms. Trading companies whose shares are to be business assets must not have any non-trading activities if these are capable of having a "substantial" effect on the nature of the company's activities. The Bulletin confirms that "substantial" means 20 per cent, and suggests that the likely factors the Revenue would look at are turnover, assets employed and management time spent.

There have been concerns about exactly what the definition "holding company of a trading group" includes. For example, many holding companies also own the group's properties and receive rent. There was concern that this could prevent the company from qualifying because it was doing something other than holding shares in its subsidiaries. The Bulletin confirms that holding properties and letting them to group companies will be ignored when considering the holdco's activities. It also confirms that all intragroup transactions are to be ignored when considering whether the group is a trading group.
 Business asset Non-business asset

Period for % gain Effective % gain Effective
which asset charge- tax rate charge- tax rate
held (full able (higher able (higher
yrs) rate rate
 taxpayer) taxpayer)

 0-1 100 40% 100 40%
 1-2 87.5 35% 100 40%
 2-3 75 30% 100 40%
 3-4 50 20% 95 38%
 4-5 25 10% 90 36%
 5-6 25 10% 85 34%
 6-7 25 10% 80 32%
 7-8 25 10% 75 30%
 8-9 25 10% 70 28%
 9-10 25 10% 65 26%
10- 25 10% 60 24%

Trevor James is a partner at PricewaterhouseCoopers
COPYRIGHT 2002 Chartered Institute of Management Accountants (CIMA)
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Copyright 2002 Gale, Cengage Learning. All rights reserved.

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Author:Constable, Trevor James
Publication:Financial Management (UK)
Date:Jan 1, 2002
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