Selling a business or company after the 2008 tax changes
The changes announced in the pre budget report have come as a nasty shock for anyone looking to sell shares in their business or company. The main impact will be an 80% increase in the tax charge.
Most business owners would have qualified for full business asset taper relief and therefore could look forward to an effective 10% rate of CGT on selling their businesses. As from 6 April 2008 the same individuals may now be looking at an 18% tax charge.
This is a substantial increase for anyone counting on the capital value of their business as part of their retirement nest egg. On a gain of £1,000,000, for example, this equates to an increase in CGT from £100,000 to £180,000.
Many business owners will therefore be potentially worse off, however as always there are will be some who may be able to derive some tax benefits.
Who are the losers?
Anyone who has owned their business for a significant period will lose the benefit of indexation relief and taper relief. Indexation relief applies to assets acquired before April 1998 and is designed to provide relief for the effects of inflation. So, for example, anyone who purchased their business in the 1980s would look to obtain substantial amounts of indexation relief on a disposal in 2008.
The withdrawal of indexation relief will mainly affect a business seller who originally purchased a business. Anyone who has set up their own business from scratch may well not qualify for significant amounts of indexation relief in any case (as indexation relief usually applies to the original cost).
The loss of taper relief will, however, be a huge blow for many business owners who have owned their shares long term.
Non UK domiciliaries
Another change in the pre budget related to the use of the remittance basis. As from April 2008 anyone (usually a non UK domiciliary) who wants to use the remittance basis would need to account for an annual £30,000 tax charge.
Therefore a non UK domiciliary selling an overseas business could, under the current rules sell the business and retain the proceeds outside the UK. This would then enable him to avoid CGT in full. As from April 2008 if the remittance basis was to be used there would be a £30,000 tax charge to be paid for the privilege.
Of course if you're gain is large this may be a price worth paying, but for smaller gains this is unlikely to be the case.
Basic rate taxpayers
Anyone who sells assets with the gain within their basic rate tax band would currently be taxed at a CGT rate of 20% before any taper relief. Assuming full non business asset taper relief this would reduce the effective rate of 12%. As such for basic rate taxpayers the new 18% flat rate of CGT is not attractive in tax terms.
Who could benefit?
The two main types of business disposals that will benefit under the new proposals are:
- Disposals after a short ownership period
- Disposals of non trading businesses
For any higher-rate taxpayers who have bought a business and sold it within one or two years it is likely that they will be better off under the proposed changes.
The current effective capital gains tax rates for a higher-rate taxpayer selling business assets are as follows:
| CGT rates | |||||||||||||||||||
| Ownership Period | Effective tax Rate | ||||||||||||||||||
| Less than 1 year | 40% | ||||||||||||||||||
| 1-2 years | 20% | ||||||||||||||||||
| 2+ years | 10% | ||||||||||||||||||
Therefore it is only business owners who own businesses for at least two years at the date of disposal who will qualify for the 10% rate of capital gains tax.
The new 18% flat rate of CGT looks very attractive if you've only owned your business for a few months and is still beneficial if you've owned it for less than two years.
One occasion where this can be important is on incorporation. The incorporation of a business into a company 'resets the taper relief clock' for tax purposes. Therefore it sometimes arises that an individual incorporates his business but then soon after decides to sell it. If the period since incorporation is less than one year, you would be looking at a 40% tax rate on the disposal of the shares. Under the new provisions though, you would pay CGT at 18%, irrespective of the period of ownership.
Investment businesses
A disposal of an investment business would not currently qualify for business asset taper relief -- only non-business asset taper relief.
Even with maximum non-business asset taper relief the effective CGT rate for a higher rate taxpayer would be 24%. Therefore, the move to an 18% rate of CGT can represent a significant tax saving.
This is amplified by the fact that full taper on the disposal of investment businesses would usually only apply where there has been at least ten years of ownership. For disposals in tax year 2008/2009 (ie 6 April 2008 -- 5 April 2009) the table below compares the effective tax rates by the year of acquisition under the proposed and existing rules (for a higher rate taxpayer and assuming a mid-year disposal/acquisition).
| Effective capital gains tax rates | |||||||||||||||||||
| Date of acquisition | Proposed rules | Existing rules | |||||||||||||||||
| 6 April 07-5 April 08 | 18% | 40% | |||||||||||||||||
| 6 April 06-5 April 07 | 18% | 40% | |||||||||||||||||
| 6 April 05-5 April 06 | 18% | 38% | |||||||||||||||||
| 6 April 04-5 April 05 | 18% | 36% | |||||||||||||||||
| 6 April 03-5 April 04 | 18% | 34% | |||||||||||||||||
| 6 April 02-5 April 03 | 18% | 32% | |||||||||||||||||
| 6 April 01-5 April 02 | 18% | 30% | |||||||||||||||||
| 6 April 00-5 April 01 | 18% | 28% | |||||||||||||||||
| 6 April 99-5 April 00 | 18% | 26% | |||||||||||||||||
| 6 April 98-5 April 99 | 18% | 24% | |||||||||||||||||
| 6 April 97-5 April 98 | 18% | 24% | |||||||||||||||||
This gives you some idea of the differences in the tax rates for a higher rate taxpayer. In particular, anyone selling an investment business after less than five years ownership is looking at a significant tax saving.
Reliefs
It's worthwhile remembering though that there are still plenty of reliefs available for reducing the gain. You can still use rollover relief, gift relief and the share exchange provisions to defer or eliminate any gain.
About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
=============================================================
Disclaimer
=============================================================i) Please note that the articles/answers contain general guidance only and do not constitute accountancy, tax, investment or other professional advice.
ii) The contents of this article/answer are for information only and are intended to assist readers in identify any tax planning opportunities that may be available to them. The information contained in this answer is not intended to be a substitute for taking proper taxation advice and should not be relied upon in this way. Always consult a qualified accountant or taxation adviser. Your situation will then be looked at individually and specific advice relevant to your circumstances can be given. The Expert does not accept responsibility for any loss arising as a result of reliance on any information contained in this answer.
These Notes (and Disclaimer) do not affect your statutory rights in the United Kingdom.