Small firms vulnerable to sudden change of tack; Is the playing field still level after CGT changes, Victoria Wyatt-Wright, tax manager, Birmingham, considers the question.
The proposed changes to CGT would appear to smack of a complete change of political heart by the government, and if it wasn't for the fact that the changes were delivered by a new Chancellor, Gordon Brown would appear to be very fickle indeed.
While a flat rate of 18 per cent would suggest that the time has come to introduce a level playing field on disposal of assets, when you consider that the players range from speculative investors on the property or stock markets to owners of "lifeline" family businesses, you can certainly see that the goal posts have been moved in favour of the speculative investor.
Business assets Vs non-business assets
Ironically, it was Gordon Brown himself who first drew the distinction between business assets and non-business assets when he introduced the taper relief regime in April 1998.
By April 2000, the definition of business assets was very wide, including shares in unquoted trading companies, most employee owned shares and many AIM shares.
The result After just two years of ownership, business assets would attract a 10 per cent effective tax rate on disposal.
The rationale? To reward entrepreneurs and smaller businesses, considered to be the backbone of Britain, for the risks undertaken in such enterprises.
Furthermore, non-business assets, which is everything which does not qualify as a business asset, also benefit from a reduced rate of tax depending on the length of ownership of the asset. So, after 10 years of ownership for a higher-rate taxpayer the effective rate of tax is reduced to 24 per cent.
The practical effect of the proposed changes will mean different things to different people depending upon their circumstances.
This article will concentrate on those who are going to be hardest hit - shareholders of owner-managed businesses.
So is there anything our owner-managed business owner can do now, before April 2008, to mitigate this effect? Well, as is often the case in the world of tax, it depends.
The most obvious answer is to find a willing buyer and effect the disposal before the changes take place. However, a word of caution. If you are considering a sale, are you actually getting a good deal?
Purchasers may be looking to discount the price, given they are in the driving seat.
Alternatively, you may instead decide to 'bank' the taper relief accrued to date. This might be achieved by using what is known as a settlor interested trust which crystallises a disposal for CGT but into an entity in which the individual still retains an interest.
If a commercial sale is likely to go ahead anyway but timing is an issue, it might be an idea to use a rescindable contract, which should mean that a sale can complete after the change to the tax rate, but with the benefit of taper relief.
A further note of caution for those shareholders who have already sold their businesses and received loan notes as part of their consideration.
HMRC has issued a statement which says that any debenture which has a tapered gain held over into it will not benefit from taper relief if the note is redeemed on or after 6 April 2008. HMRC will therefore be "thawing" frozen gains in what were known as "QCBs" and applying the new legislation to those assets.
In the same vein, a shareholder may have been issued with Non-QCB loan notes. These debentures inherit the history of the shares which they replaced. As a result, they currently continue to accrue taper relief in their own right. Not after April 2008.
In either case, provided the loan note permits early encashment before 6 April 2008 and it is commercially feasible, it would be sensible to secure the benefit of taper relief, and the 10 per cent tax rate which goes with it. For those who are in the midst of a transaction, restructuring the deal in order to avoid loan notes is something to be considered in order to obtain the benefit from taper relief before it vanishes.
Finally, thousands of workers will be hit hard by the changes, particularly those paying tax at the basic rate. Save as you earn schemes operate to encourage employees to invest in the companies they work for and to retain the shares going forward.
Under the current rules the employee gets an option to buy shares at a discount. The employee would normally be encouraged to hold on to those shares for at least two years to benefit from the coveted 10% tax rate (or even less for a basic rate tax payer).
With the new rules 18 per cent would apply either way.
It would therefore be worth anyone who is in such a scheme and has already owned the shares for more than 2 years considering selling before April 5 2008.
The Enterprise Management Incentive (EMI) has also been very popular in recent years as it is the only scheme which allows options to accrue taper relief from the date of grant.
For those employees with EMI options, the changes are particularly nasty. It seems that, for the time being, EMI scheme options holders are stuck with a future 18 per cent tax rate rather than the 10% rate they expected.
What is clear from these changes is that the heady days of 10% tax rates for business assets are likely to be numbered. If you are concerned about the impact that this may have on your own business assets, then you are well-advised to seek tax advice sooner rather than later - before it is too late.
|Printer friendly Cite/link Email Feedback|
|Publication:||The Birmingham Post (England)|
|Date:||Nov 22, 2007|
|Previous Article:||Safety first with contingency plan; The termination of taper relief and indexation: Stephanie Churchill, senior tax manager, Birmingham, explains.|
|Next Article:||Pre-Budget Report; Forgotten assets of the Pre-Budget Report. William Dowsett, senior tax manager, Birmingham, explains all.|
|Budget: Chance for more to reap dividends; Share options.|
|Industrialist slams PBR attitude over small firms; ECONOMICS.|
|Changes to CGT could hit small firms hard; SME Development Review.|
|Firms in plea over 'ruinous' changes in tax.|