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Capital Gains Relief for Entrepreneurs Announced

Newsletter issue - February 08.

Small businesses had been promised some sort of concession from the proposed hike in Capital Gains Tax (CGT) from 5% or 10% (see below) to 18%. We thought a form of retirement relief would be introduced, but instead a brand new entrepreneurs relief has been announced.

The new entrepreneurs' relief can apply when you sell part or all of your business, or shares in your own company after 5th April 2008. The capital gain will be cut by 4/9ths leaving 5/9ths taxable at 18%. This makes the effective CGT rate on the gain before allowances just 10% instead of 18%. Currently where full business asset taper relief applies a higher rate taxpayer pays CGT at 10% and a lower rate taxpayer pays CGT at 5% on the same gains.

From sale of a business in 2008/09£
Gain from selling your business:450,000
Less Entrepreneurs' relief (4/9 x 450,000)(200,000)
Taxable gain before allowances:250,000
Less annual exemption for 2008/09 say:(9,500)
Net gain:240,500
CGT due at 18%43,290

Any capital losses can also be set-off after the deduction of the entrepreneur's relief, which was not the case with taper relief.

There are some tight restrictions to the new entrepreneur relief:

  1. You must be disposing of part or all of your business, and there are likely to be some detailed rules on what 'part of a business' means. If you are selling a single asset, perhaps one field from your farm, entrepreneurs' relief is unlikely to apply.
  2. You must have held the assets or shares for at least one year before the sale.
  3. The business must fall under the definition of a trading business, which means a property letting business will not qualify.
  4. Where you are disposing of company shares you must have worked for, or have been a director or company secretary of that company, and have held at least 5% of the ordinary voting shares.
  5. The relief only applies to the first £1 million of qualifying gains made after 5 April 2008. Gains in ex£1 million, or which do not qualify for other reasons will be taxed at 18%.

More restrictions may emerge when the full details are known.

If you are planning to sell your business the entrepreneurs' relief may allow you to defer the sale until after 5 April 2008, and not pay any more tax than you would pay if the sale was made before 6 April 2008, but where the gain is expected to run into millions, the maximum tax you will save by claiming that relief is £80,000.