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Prior to 6 April 2008, Business Assets Taper Relief was
available as a replacement for indexation (inflation)
allowance and also for retirement relief .
Taper relief was available to reduce gains on a sliding scale according to the complete number of years that an asset had
been held from acquisition or from 6 April 1998 if later.
Rate of Taper
For disposals on or after 6 April 2002,
the taper relief rate for business assets was 50% after one complete year
and the maximum 75% after two complete years.
For 2007/08 with lower and higher tax rates of 20% and
40% this gave rise to effective tax rates after maximum
taper relief of 10% on business assets for a higher rate tax payer and
5% for a basic rate tax payer.
This compared with tax rates for non
business assets with maximum taper of 24% and 12% respectively. These
rates for non business assets applied only for disposals after ten
complete years.
The difference in capital gains tax
payable for business and non business assets was therefore
considerable.
Definition
of Business Assets
For the year in which relief can be
claimed, a business asset was defined broadly as:
| 1. |
An asset used for the purposes of a trade carried on by the individual (either alone or in partnership) or by a qualifying company of that individual. |
| 2. |
Assets held for use in his employment by an employee working for a trading employer. |
| 3. |
Shares in a qualifying company,
i.e. |
| |
(a) |
a trading company or holding company of a trading group which is either an unquoted company, or a quoted company in which the tax payer is an officer or employee, or in which he holds 5% or more of the voting rights. |
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(b) |
a non-trading company or holding company of a non-trading group in which the tax payer is an officer or employee, where the tax payer does not have a material interest (broadly not more than 10% of share capital) in the company or a company controlling it. |
With regard to heading 1.
it should be noted that if an asset other than shares is used by any unquoted trading company, the company is the tax payer's qualifying company and the asset qualifies as a business asset.
Business Assets Taper relief was therefore available to a landlord with an unquoted trading company tenant. From 6 April 2004
this relief had been extended to let property used by
unincorporated traders.
Where an asset is disposed of which has
changed its status from "non-business asset" to "business asset" (or
visa versa) at some point during up to a ten year period of ownership
the rates of taper relief applicable must be apportioned. For example a
disposal on 6 April 2007 of a property let to an unincorporated trader
since commencement of ownership on 6 April 2000 will attract 3/7ths
business assets taper relief and 4/7ths non business assets taper relief
("tainted taper").
The detailed provisions
relating to the definition of 'business assets' are complex and in some instances
unclear. Great care needs to be taken to ensure that the necessary conditions are satisfied.
In their June 2001 and December 2002 Tax
Bulletins the
Inland Revenue published guidance on the meaning of
various terms used in the legislation, but it remains
unsatisfactory that these meanings have not been made
clear in the legislation itself.
A prime example is that a trading company
will not be
regarded as such for business assets taper relief if, for
example, it has too much in the way of non trading income, investments
or cash. Quite where the line is drawn is often not clear.
Entrepreneurs
Relief
Following recent changes to the Capital
Gains Tax regime and the removal of Business Assets Taper Relief, the
Chancellor has introduced an Entrepreneur’s Relief which gives an
effective 10% rate for the first £1 million of lifetime capital gains on
the disposal of business assets.
Summary
Business assets taper relief with an
effective 10% tax rate was a valuable tax relief as is its partial
replacement, Entrepreneurs Relief. However, in view of the complexities
of the reliefs, it is recommended that professional advice is sought at
the earliest opportunity to ensure that appropriate steps are taken to
maximise any available tax relief.
Please note:
This guide is intended to
provide basic information only. Where specific advice is required, we
recommend that you seek proper professional help; either from this firm
or other suitably qualified person or practice.
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