THERE is a lot of speculation concerning what changes to the capital gains tax system will be announced in the forthcoming emergency Budget.
The coalition government has stated: “We will seek ways of taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities.”
The existing exemption for entrepreneurial business activities is Entrepreneurs’ Relief and in the March Budget it became more generous when its maximum lifetime allowance was increased from £1m to £2m for disposals of business assets on or after April 6, 2010. The effective rate of CGT on such gains is 10%.
Qualifying gains include the disposal of the whole or part of a business carried on by an individual or partnership member.
In the vast majority of cases, most saleable businesses are carried on via a limited company and Entrepreneurs’ Relief will be available on the sale of the shares in an individual’s personal company, if throughout a period of 12 months prior to the disposal the company carried on a qualifying trade and the individual owned at least 5% of the ordinary share capital and voting rights and they were an officer or employee of the company.
Where practical, action needs to be taken for those with holdings of less than 5% but who are directors or employees to ensure that they have this minimum shareholding 12 months before disposal. This could be affected by transferring ordinary shares to a spouse. Such inter-spouse transfers are exempt from CGT.
For shareholders letting property to their personal trading company or a partner to a trading partnership, Entrepreneurs’ Relief is restricted to the extent that any rent is paid. This restriction applies for those in receipt of rent on or after April 6, 2008. Consideration needs to be given as to whether rents should cease in order to secure some measure of Entrepreneurs’ Relief against the individual’s need for rental income to pay interest on any mortgage taken out to buy the property.
The entitlement to Entrepreneurs’ Relief could also be jeopardised if a trading company holds substantial investment assets or undertakes substantial non business activities. Consideration and timely planning needs to be given to demerging non business assets/activities in order to protect the company’s status as a trading company.
If Entrepreneurs’ Relief is not secured and gains on the disposal of the shares are taxed at rates applying to non business assets, the potential loss of tax could be as high as £160,000 based on the current CGT rate of 18% (£2,000,000 x 18-10%), possibly rising to £600,000 if non-business asset gains are taxed at 40% following the Budget or £320,000 to £1,200,000 for husband and wife together!