The Chancellor, Alistair Darling, announced the introduction of a new relief “entrepreneurs’ relief”. Before you all get excited thinking those of you who run your own business are about to receive some new wonderful relief that will reduce your tax bill, let us explain.
This new relief relates to Capital Gains Tax for gains arising on the disposal of a business. The relief has been introduced following the uproar which surrounded the new Capital Gains Tax reforms that were announced in the Chancellors Pre Budget Report in October 2007 and take effect from 6 April 2008.
In the Pre-Budget report it was announced that the currently available Taper relief which in many cases means a person on the disposal of a business only pays tax at a rate of 10% is to be abolished from 6th April 2008 and that all gains are instead to be taxed at a rate of 18%. As is quite understandable, this increased rate didn’t go down too well with business owners so the Chancellor promised to review his proposed reforms.
After much waiting the Chancellor’s new proposal is to introduce Entrepreneurs’ Relief, this is to be available in respect of gains arising on the disposal of all or part of a trading business or on gains arising on the disposals of shares in trading companies by individuals who were involved in running the business.
The new relief will mean that gains which qualify will once again be charged at an effective rate of 10% on the first £1 million of lifetime capital gains. Gains in excess of £1 million will be taxed at the standard rate of 18%.
The conditions for the new relief will be broadly based on the old Capital Gains Tax ‘retirement relief’ rules which were phased out between 1998 and 2003, but it promises to be simpler. The new rules also take some of their definitions from current taper relief rules relating to business assets. However there are major differences which could prove costly.Whilst it might be seen as positive that the chancellor has realised that he needed to think about the effect the new Capital Gains Tax reforms were to have on businesses, the pity is that he didn’t think of it sooner and ensure that an about turn was not needed.
Business owners do still need to plan for the disposal of their business and consider the timing of their disposal carefully. The new Entrepreneurs Relief does not quite make everything rosy again and professional advice should always be sought when carrying out a major transaction such as a business disposal.