Entrepreneurs relief and the directors loan account

The new Entrepreneurs reliefthat applies from 6 April 2008 will continue to allow a tax free loan account to be created on the incorporation of a business. Under the previous taper relief regime, someone incorporating a trading business into a company could claim taper relief to reduce any gain by 75%. Therefore a popular strategy is to restrict the capital gain arising so that the gain is fully covered by taper relief and the annual exemption. The gain is typically restricted by only claiming partial gift relief. For example if the annual exemption was £9,500, the capital gain is restricted to £38,000 with the rest heldover under gift relief. There is no capital gains tax payable as after 75% taper relief and the annual exemption the gain is nil. However the proceeds on the gain can then be extracted free of CGT. The introduction of a flat 18% rate of CGT would have eliminated this. However the new Entrepreneurs relief should allow the tax free loan account route to continue but in an amended form. ie, as the annual exemption is £9,600, the gain could be resticted to £17,280. On a gain of £17,280 Entrepreneurs relief would reduce this by 4/9 (£7,680) leaving a capital gain of £9,600 which would be fully covered by the annual CGT exemption.