Harris Lipman News

Capital Gains Tax rate goes from 40% to 18% - an 80% increase!

24/10/2007

So says accountant Barry Lewis of Chartered Accountants Harris Lipman who appears to have mislaid the calculator!  But all will become clear as he explains that the headline rate of 40% is not normally paid by most business owners who sell their business, as with just a little planning, they should have been able to pay a much lower rate of 10%.

However that regime will now change from 6/4/08 as the Chancellor has ‘streamlined’ the capital gains tax system, so that all gains will now be taxable at 18%, irrespective of the length of time the asset has been held for, or the age of the vendor.

Barry explains “This brings with it some opportunities for business owners, but they only have a short period of time to act, between now and 6 April 2008, in order to potentially still pay a rate of 10%.  There are 3 particular issues and circumstances to consider:

• any business owner who has sold their business in the past for any element of deferred or loan note consideration, upon which the tax hasn’t yet been paid, needs to consider whether they can restructure the loan notes to crystallise the tax at 10%

• all business owners need to take advice about their options for tax planning now, perhaps transferring their business to another more tax efficient vehicle, such as a trust, so that the gain crystallises before next April at potentially a lower rate than 18%

• all business owners need to consider how they are going to increase the value of their business before they sell, so that when they are ready to sell in the future, they are still receiving a good amount of after-tax cash, despite the Chancellor’s best efforts!

This major reform to capital gains tax according to the Chancellor “aims to ensure a more sustainable system that is straightforward and internationally competitive”.

The reality is that this proposed abolition of CGT taper relief is none other than draconian, particularly as there appear to be no transitional provisions.  Not only will it affect disposals occurring after that date: it will also hit gains on earlier disposals which have been deferred but which crystallise after that date. Gains deferred under EIS and gains arising on earn-outs are two hard cases which immediately come to mind.  As a response to inappropriate use of the relief by private equity firms this is overkill with a vengeance! 

 

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