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Capital gains tax


The Chancellor announced two changes of significance on capital gains. He has also increased the annual CGT exemption. As far as the more significant changes are concerned these are as follows:

  1. Business Assets Taper Relief

As inferred in the pre-Budget report, the Government has decided to extend the capital gains tax (CGT) business assets rate of taper relief to employees disposing of shares in non-trading companies where they work so long as they do not have a material interest of more than 10 per cent in the company.

In addition, assets other than shares disposed of by the trustees of a settlement that have been used for the purpose of trade by a partnership of which the trustees are a member will be eligible for business assets taper relief.

Of most interest is the extension of CGT business assets taper to employees of non-trading companies. In this connection, employees, including part-time employees, and officers of the company in which they hold shares (or of any company that is in the same group or that has another relevant connection with the company) will qualify for business assets taper relief on the sale of their shares.

However, as ever Inland Revenue protection rules are needed to prevent people obtaining an unfair tax advantage by securitising their personal assets in companies of which they are directors or employees, whether in a company that they set up themselves (or with friends) or in a company that is set up for the purpose by a finance house.

At the time of the pre-Budget report it was envisaged that shares in non-trading close companies would be excluded from the new relief. However, following consultation, the Government has instead decided that an employee will be eligible for business assets taper relief on shares in a non-trading company if he or she does not have a material interest in the company or in a company that controls that company. A person would have a material interest if he/she held or was entitled to acquire:

  • more than 10 per cent of any class of share or security of the company; or

  • more than 10 per cent of the voting rights in the company; or

  • a right to more than 10 per cent of the profits of the company that are available for distribution; or

  • entitlement to more than 10 per cent of the assets of the company on winding up or in other circumstances.

For the test, the rights of connected persons (such as spouse, relatives and certain trusts and companies) would be added to the individual’s rights.

The Government will review the effectiveness of the revenue protection measures after two years.

The Government will also extend business assets taper relief to shares owned by the trustees of a settlement in a non-trading company where an eligible beneficiary is an employee or officer, provided that the level of the combined shareholdings of the trust and connected persons does not exceed 10 per cent.

  1. Capital Gains Of Non-Resident Close Companies

It has also been announced that, as regards capital gains arising on or after 7 March 2001, limited relaxations will be made to the rules designed to ensure that UK residents pay tax on investment gains as they arise where the investments are held in a closely controlled non-resident company.

Gains of non-resident close companies will no longer be attributed to United Kingdom resident participators where:

  • the resident participator has an interest of 10 per cent or less in the gain, or

  • the gain arises on any assets used outside the United Kingdom in a trade carried on outside the United Kingdom, or

  • the gain would be attributed to an exempt approved pension scheme.

The rules for giving credit for tax on gains against tax on subsequent distributions of

those gains will also be relaxed.


This is increased from £7,200 in 2000/2001 to £7,500 in 2001/2002 for individuals and personal representatives, and (in most cases) from £3,600 to £3,750 trustees.


No change has been proposed regarding the rates of capital gains tax which are, of course, largely as for income tax. In brief terms, these will be subject to tax as if they were the top slice of income and be taxable at 10%, 20% (basic rate tax band) or 40% as appropriate.

For example, as a result of a long period of effective tax and financial planning John has taxable income (ie. after personal allowances and deductions) of £1,400. He then realises £37,800 of capital gains (after the annual CGT exemption).

John&#39s capital gains will be subject to tax as follows:-

£480 @ 10% (up to £1,880)

£27,520 @ 20% (up to £29,400)

£9,800 @ 40% (over £29,400)

Whilst particularly welcome in respect of income tax, it will be comparatively rare for an individual to have an intact (or partially intact) £1,880 10% tax band to set against capital gains in excess of the annual exemption.


No changes have been proposed here but we thought that, nevertheless, it is worth stating the current position regarding retirement relief which, following the introduction of taper relief in 1998, is being gradually phased out. The relief ends completely from 6 April 2003.


It was been proposed (as it was in the Chancellor&#39s pre-Budget report) to extend capital gains tax business assets taper relief to shares owned by employees (including directors) of non-trading companies.

In this connection, it is important to note that the pre-Budget press release on the subject made it clear that the relaxation is primarily directed at shares owned by employees (including officers such as directors) rather than non-employed shareholders.

It is intended that the business assets taper relief rules for non-employee shareholders will remain unchanged which means that “substantial” (thought to be 20% or more) investments may cause business assets taper relief to be denied.

The Inland Revenue are keen to ensure that the relaxation is not used as a means of individuals using companies to hold their investments and claiming business assets taper relief. The risk of this is likely to be greatest in respect of owner/directors.

One anti-avoidance option that has been put forward is that close companies will still need to satisfy the trading company condition (effectively denying relief if there are "substantial" investments) for their shares to qualify for business assets taper relief.

These proposals follow hard on the heels of those made in the last Budget and enacted in the Finance Act 2000 to dramatically increase the attraction of business assets taper relief. As a reminder of what these important changes were the following may be useful!

  • the business assets taper period was shortened from 10 years to 4 years

  • the bonus year of ownership for those who owned qualifying assets on 16 March 1998 was removed which means that the ownership period to qualify for business assets taper relief starts to run from 6 April 1998

  • the number of voting shares that an individual needs to hold to qualify for the relief was reduced so that all shareholdings in unquoted trading companies, all shareholdings of employees in quoted trading companies and shareholdings held by outside investors in quoted trading companies which carry at least 5% of the voting rights will qualify as business assets. All employees, not just full-time employees, benefit from these changes.

Unquoted companies for this purpose are defined as those which have no shares or securities listed on a recognised stock exchange. Shares traded on the AIM are treated as unquoted.

The changes enacted in the Finance Act 2000 apply to all disposals of qualifying assets after 5 April 2000 .


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