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Bad timing

Last week, I looked at the possibility that some sales of private trading businesses may have been held up pending April 6, when 75 per cent business assets taper relief and an effective capital gains tax rate of 10 per cent for a higher-rate taxpayer will be available for disposal of qualifying assets where the disposer can satisfy a two-year ownership condition.

My thought was that this may release funds for investment and that advisers should be reasonably well informed on both the tax rules and the options open to people for investing the lump sum realised.

Of course, the purchase price of the assets may be paid in instalments, with payment linked to earnings/profitability – typically called an “earn out” – with the current owners/management team staying in place. There are few buyers who will pay a substantial and unconditional capital sum for the purchase of a business.

While on this subject, in the wake of the much maligned CP121 issued following the second stage of the polarisation review, it may well be that IFAs themselves are taking a strong interest in the business assets taper relief rules ahead of the possible sale of their business in view of the proposed relaxation of the limitations on investment in IFAs by providers.

Whether those IFAs stay IFAs after the disposal will, presumably, depend on the objectives of the provider regarding the best method of securing a return on the investment. No doubt those providers which made significant estate agent acquisitions in a past headlong dash to secure a distribution channel will think very carefully before setting out on the IFA acquisition trail.

Come what may, taper relief will play a big part in the attraction or otherwise of a sale. Some IFAs, if made an attractive offer, may think of the quote from William Shakespeare: “There is a tide in the affairs of man which taken at the flood leads on to fortune. Omitted, all the voyage of their life is bound in shallows and in miseries.”

The CGT environment has rarely been so attractive for disposers of businesses and, coupled with uncertainty surrounding the financial advice market, this may be considered the “flood” that must be capitalised on by an IFA.

As a brief reminder of the taper relief rules, the following may help. Taper relief was one of a number of fundamental changes to CGT that were proposed in the 1998 Budget and largely carried through into the Finance Act 1998. The statutory provisions are included in S2A TCGA 1992 and Schedule A1 TCGA 1992.

The reform aimed to encourage investment by promoting the longer-term holding of assets by reducing the amount of gain chargeable to tax and thus the effective rate of CGT on longer-held assets. Gains on business assets that had been held for four years (originally 10 years, and two years in respect of disposals after April 5, 2002) or more would be reduced by 75 per cent so that the effective rate of tax payable for a higher rate taxpayer would be 10 per cent.

The changes were intended to lead to simplification of the CGT system by progressively removing indexation, a major complicating feature. However, bearing in mind the complex rules for calculating taper relief, particularly where a taxpayer has more than one gain or loss in the tax year, it is difficult to suggest any simplification has been achieved.

Taper relief applies where, for 1998/99 or any subsequent year of assessment, the relevant taxpayer (an individual, trustees or personal representatives but not companies) has an excess of chargeable gains over the aggregate of allowable losses for the year and losses brought forward from previous years and that excess is or includes a chargeable gain that is eligible for this relief.

Last June, the Treasury announced that the taper relief for qualifying business assets is to be 50 per cent after one year of ownership and 75 per cent after two years for disposals occurring on or after April 6, 2002.

When it comes to considering the qualifying company test, it is important to bear in mind the points made in an earlier column about investments made by a company which, if held immediately prior to sale and representing a substantial part of the business (the dreaded 20 per cent test – 20 per cent of exactly what depending on the facts of the case), can deny the disposing shareholder of business assets taper relief. A pre-sale audit of the assets owned by a business is essential. Business assets taper relief is a valuable prize and it would be silly to lose it by failing to consider this point and taking any necessary action – which may well be the liquidation of the investment before the business sale takes place.

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