One of the more important changes announced in the recent pre-budget report was that Capital Gains Tax (CGT) taper relief, which was introduced in 1998, will be abolished with effect from the end of the current tax year. Under the new regime, all capital gains will be taxed at a flat rate of 18 per cent. Currently, capital gains are taxed at the marginal tax rate of the taxpayer, but the amount subject to CGT is reduced by the taper relief applicable, meaning that for a higher-rate (40 per cent) taxpayer benefiting from full taper relief, an effective CGT rate of 10 per cent would apply.
This will clearly have a significant effect on the amount of the after-tax receipts when business assets are sold but, more particularly, may also affect the structure of some deals. It is common to tie in the management of businesses being taken over, for a period, to ensure continuity of the business under its new owners. Taper relief assisted this process, since it was possible to structure such deals so that the management of the ‘sold’ business received shares and then benefited from taper relief after the shares had been held for two years. This will no longer be possible.
For people who would benefit from taper relief, ensuring deals are completed by 5 April 2008 is worth considering. In most cases, unless a deal is already in negotiation, the timescale between now and the end of the tax year is too short for the process of marketing the business to sale to be completed – and in any event, most exit routes are better if there is forward planning and proper preparation of the business for sale.
At the time of writing, it looks as though the Government will yield to pressure and provide limited CGT relief through the reintroduction of retirement relief. Watch this space.
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