The Chancellor's move to end taper relief and introduce a flat rate capital gains tax of 18 per cent shocked many in the business community when the proposals were announced in October 2007. Although some mitigations have been announced - and more are expected - what will the new policy mean for Yorkshire's business owners? David Casey finds out.
When Chancellor Alistair Darling hosted a meeting for 20 carefully selected UK business owners at 11 Downing Street in late September 2007, it seemed as if entrepreneurial endeavour was at the top of the government's agenda. The consultation was designed to kick-start work on a new enterprise framework, aiming to deliver the conditions for business success and further remove the barriers to the creation and growth of businesses across all regions.
Few then could have predicted the blow that the Chancellor delivered to UK businesses just two weeks later. Darling's pre-budget report bombshell - that he wanted to make private equity bosses pay more capital gains tax (CGT) and in doing so would have to hit all businesses owners - left many in the business community reeling. The CBI said the move "undermined the ten-year effort by the government to promote enterprise and risk-taking within the UK," while Sheffield Chamber of Commerce asserted that it would cause "immense harm".
"The proposed changes to the capital gains tax framework are going to hit every entrepreneurial individual in the UK and will dull the incentive for growing business and driving enterprise," says Nicholas Cotton, founder of Harrogate-based private investor group The Wealth Enhancement Forum. "The long-term dampening of this enterprising spirit is a massive issue for this country and it's just the kind of ill-conceived tax hike that can cripple our economy over a period of years."
Although clearly unpopular, few concessions to the original proposals have been suggested since first announced. The Chancellor's plans centre on a move to end CGT taper relief and replace it with a flat tax rate of 18 per cent from 6 April 2008. This stems from a desire to simplify the tax system and close a loophole that allows private equity barons to pay as little as 10 per cent on part of their earnings. The annual individual exemption of £39,200, however, will remain the same.
Taper relief, introduced by the Labour government in 1998, reduces the CGT an individual has to pay when disposing of business assets. Under the current system, the amount of taper relief depends on the time an asset is held.For example, higher rate taxpayers who hold on to their assets for at least ten years currently pay a reduced rate of 24 per cent, rather than 40 per cent.
"Instead of being taxed at their current marginal rate of tax, those liable will now pay the standard 18 per cent rate," says Steve Roberts, tax director at Armstrong Watson's Leeds office. "While that's good news for those who were in the top tax bands already, paying 20 or 40 per cent, those who qualified for full business taper relief will see their tax rate jump from 10 to 18 per cent - a hefty 80 per cent increase."
The withdrawal of taper relief and indexation allowance, and whether the investments are in business or non-business assets, will now determine how much investors end up paying. Gains made on business assets, such as furnished holiday lets, farm land and shares listed on the Alternative Investment Market (AIM) held for at least two years are currently charged at 10 per cent for higher-rate taxpayers. After 5 April, any gains made on these types of asset will be charged at the new rate of 18 per cent.
Other changes relate to assets held at 31 March 1982. From 6 April 2008 the market value at 31 March 1982 has to be used. Previously the actual cost could be used if it led to a lower capital gain. Also, a disposal of an asset held at 31 March 1982 which had a capital gain held over will not have half the held over gain relieved, as is currently the case.
"The new rules will hit AIM-listed companies at a time where they are already been accused of a supposed lack of regulation," says Kevin Newton, director of Garforth-based financial adviser Prosperis. "The new measures will ensure an 80 per cent increase in the tax payable by investors in these businesses and will almost certainly deter a large number of investors from taking stakes in high risk, but potentially high return, entrepreneurial businesses. I suspect this will result in a large number of aborted start-ups in 2008."
Business owners who traditionally have seen a 10 per cent CGT liability of the sale of their business they have had for over two years will also see this jump to 18 per cent. So is it now the right time to sell for anyone thinking of making an exit? Peter Armitage, partner at Leeds-based private equity firm Key Capital Partners, believes that anyone in this position would be wise to delay rather than making a rash sale.
"Unless you are already well into the process of selling your business, you are probably better off waiting," he says. "The nearer we get to 6 April, the stronger the negotiating position of those wishing to buy the business, be that a trade buyer or a venture capitalist. Of course, it is possible to rush through the process, but, by so doing, business owners run the risk of not marketing the business properly and, therefore, not achieving its full value."
Other exit strategies are still possible, however, as ownership can be transferred to the next generation of a family business.
Although bad news for many small businesses, the changes are good news for short-term speculators and buy-to-let investors who will no longer have to hold on to assets for long periods to benefit from taper relief. "In theory, most buy-to-let investors will benefit from the changes as their marginal rate CGT bill will fall from their current rate of probably 40 per cent to the standard 18 per cent rate," says Roberts.
"However, where an investor only holds a small number of properties and has done so for a reasonable period of time the removal of indexation allowance and non-business taper relief might mean their investment will realise far less on sale than they think because of the increased CGT due."
So what of any concessions in the wake of the furore? One widely anticipated concession has been the reintroduction of a form of retirement relief. Current thinking is that this would be a £3100,000 allowance taxed at 10 per cent - a reduction, but not as significant as many had hoped for. But aside from that, and despite much muttering in the media, at the time Insider went to press, no other major u-turns seemed to be in the offing. Possible concessions include restoring reinvestment relief, rebasing the value of assets to March 2002, halting the rise in corporation tax rate for small companies, and retaining taper relief but increasing the amount of time an asset has to be held. None, however, have so far been unveiled.
"It seems clear that there will be no back-down on the 18 per cent figure, but the exact detail of the legislation could be vastly different from what was originally proposed," says Roberts. "For any business or individual, this uncertainty only goes to reiterate the importance of seeking professional advice at the earliest possible stage."