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10 January 2008
Tax tips

Scrapping Taper Relief on business assets

Planning actions to take before 6 th April to mitigate the increase in capital gains tax.

The scrapping of taper relief on capital gains tax (CGT) was fiercely attacked yesterday as the Conservatives and business leaders accused the Chancellor of keeping companies in the dark.

Changes to CGT are due in April and Alistair Darling has promised to consult businesses, but at Prime Minister's Questions David Cameron asked: "Are you going to go ahead with your 80 per cent increase in CGT rates, or are we set for another humiliating U-turn? Business needs to have the answer to this question."

Gordon Brown replied that Mr Darling would report to the Commons "in due course".

The CBI yesterday also urged the Government to clarify its position, saying that businesses needed certainty when deciding whether to invest or sell out.

Under the existing regime, capital gains are taxed at a reduced 10 per cent rate if the asset has been held for at least two years. Mr Darling wants a flat 18 per cent rate.

The CBI, as well as other business groups such as the Federation of Small Businesses, the Institute of Directors and the British Chamber of Commerce, has argued that scrapping relief would hit entrepreneurs and small family businesses.

Mr Darling proposed the change in his pre-Budget review in October, after pressure over the low levels of tax paid by the private equity industry.

Marcus Leroux - The Times

 

So what planning actions can you make before the 5th April 2008 to mitigate this increase in the capital gains tax rate?

It has been suggested that there will be some relaxation in the Chancellor's stance in proposing a flat rate of 18% on all chargeable capital gains. It is possible, for example, that the first £100,000 of gains for those business owners who would retire would be exempt. Apart from this there does not appear to be any significant change to the Chancellor's position. A brief example shows the effect of a business sale before and after the 6 th April:

 
Pre- 6 April 2008
Post 5th April 2008
 
£
£
Net sale proceeds
2,000,000
2,000,000
   
Less: Acquisition cost ( example June 1993)
(100,000)
(100,000)

Indexation relief: £100,000 x 0.153
(RPI increase June 1993 to April 1998)

(15,300)
 
______________
______________
Chargeable gain
1,884,700
1,900,000
   

Less: Business asset taper relief
£1,884,700 x 75%

(1,413,525)
 
______________
______________
Tapered gain/chargeable gain
471,175
1,900,000
Less: Annual exemption (say)
(9,200)
(9,500)
______________
______________
Taxable gain
461,975
1,890,500
     
CGT @40%
£184,790
CGT @18%
£340,290

Therefore if the sale of a qualifying business is delayed until after 5th April 2008 vendors will face a significant increase in their CGT liability.

 

Options to mitigate the tax due

Many business owners will be accelerating the sale of their company before 6 th April 2008 to lock into the beneficial 10% CGT rate. This works only to the extent that the consideration is given in cash .

Deferring part of the gain

If a fixed part is deferred leaving it as a debt rather than a formal note will bring the deferred consideration within the 10% charge (section 42 TCGA 1992). The overall charge will be set at 10% and the tax paid by the following January by which time the deferred consideration may have been paid.

Shares for shares

Where new shares are issued by the purchaser as part or all of the sale consideration the vendors' capital gain can be deferred until the new shares are sold.

Where it is forecast that the future value of the acquirer's shares would rise supported by the upside potential in the acquiring company it may be acceptable that the CGT rate paid at the time of disposal of the new shares is 18% with no taper relief or indexation as the growth in the new shares would more than compensate for the increase from the 10% charge on the value of the original shares.

Loan notes

Loan notes can be divided into qualifying corporate bonds (QCB) and those which are not (non QCBs). A QCB is exempt from CGT for an individual. If QCBs are issued in satisfaction of the proceeds of sale of shares, the gain crystallises at the date of sale and is held over until the QCB is redeemed.

A non QCB can be useful as any diminution in value of the non QCB will result in the reduction of the capital gain.

Loan stock must be issued on normal commercial terms particularly in relation to the interest rates applied.

Earn outs

Section 138A TCGA 1992 allows an earn out right in paper to be treated as a security and therefore the disposal is deemed to be paper for paper. This defers the gain on the receipt of the right to the earn out to the ultimate disposal of the new shares or loan notes earned through the earn out. If the disposal of this part of the consideration was after 5 th April 2008 then the capital gain would be taxed at 18% but as above this would afford some protection for both sides in the transaction where earn out potential is uncertain.

Becoming Non Resident

We have included a reference to this tax planning point here although the provisions in obtaining relief from UK CGT are complex. One important point "A concession will not be given by HM Revenue & Customs where an attempt is made to use it for tax avoidance." Depending on the territotity in which the taxpayer resides may mean more or less CGT due.

Conclusion

As you can see there are a number of options to deal with the capital gains and the associated tax that would arise on the disposal of a business and each of these can be used either on their own or in combination with the others depending on the circumstances of the case and the risks and rewards attached to the transaction from either side.

It has not been possible to go through all the details supporting each option referred to above and if you would require further advice on this topic please contact Charles Wiggin in our Corporate Finance Department on Charles@accountingservicesonline.net or call 0207 636 2430.