Further to pressure upon him Alasdair Darling has announced changes to his proposed measures in the pre Budget Report with regarding to capital gains tax.
Whilst the bulk of the measures stay the same he has introduced an Entrepreneurs Relief to protect the 10% rate for small business owners selling their business.
The principle difference between the Entrepreneurs relief and the existing taper relief are as follows:-
1. Business Property
Under the old regime anybody letting property to a trading business would qualify for the 10% business asset taper relief whereas, under the new regime, the property has to be used in your own business.
2. Quantity of Relief
Under the old regime the amount that one could protect under the business asset taper regime was unlimited whereas, under the new regime, there is a £1m lifetime limit on the amount of profits that can be sheltered.
3. Indexation Allowance
Under the old regime one could obtain indexation allowance on their disposals, under the new regime this will not be available.
The question therefore is should action be taken before the 5 April in order to benefit from the new regime rather than the old regime.
We believe that people in the following circumstances may want to take action prior to April in order to mitigate their taxation liabilities.
1. Individuals with property portfolios which are let to limited companies where they are considering a sale may want to advance the Exchange of Contracts prior to the 5 April in order to benefit from the existing regime. We do not believe it is appropriate to undertake transactions specifically to mitigate the change of Legislation without undertaking a genuine sale to a third party, the reason for this is that for the more expensive properties this would incur a stamp duty charge of 4% and therefore you would be incurring effectively a 14% tax charge today, to save an 18% tax charge at some stage in the future which we do not feel can be commercially justified.
2. Individuals with large business portfolios who expect to make gains in excess of £1m over their lifetime may wish to consider disposing of certain business assets prior to the 5 April in order to crystallise the savings that are available. The issue as to whether one should do an artificial transaction in order crystallise the saving is very much a personal one, as to whether one believes it is best to pay 10% now or 18% at some stage in the future.
3. There is a short term opportunity for couples with assets that were acquired after the 5 April 1982 to transfer them between spouses and thereby crystallising the indexation allowance. We recommend that couples who do have assets in these circumstances should enact this transaction as there is no tax consequence as a transfer between husband and wife occurs at a no tax gain tax loss price. However, the effect of this is that the spouse receiving the asset has a base price of the original price plus the indexation to April 1998 (when indexation ceased) whereas post 5 April 2008 the existing spouse will lose that indexation.
It should be noted that there is a “grey” area regarding assets held pre 31 March 1982. It would appear that under the Legislation as currently drafted there would be no point in transferring the asset as the indexation would not be transferred. The Revenue are apparently aware of this, and are considering drafting Legislation to enable these transfers to also benefit from the locking in of the indexation allowance, however, the Legislation has, as yet, not been drafted.
Should you require any further information regarding the above, or any assistance in undertaking any of the transactions considered above, please contact Jacky Buchsbaum on 0161 723 3211.
Date:25 March 2008
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