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Carry on, don&#39t lose your taper relief

Following my previous article (Down to business on taper relief, Money

Marketing, March 16), I am going to develop the theme of corporate

investment by looking at paragraph 11 of Schedule A1 of the Taxation of

Chargeable Gains Act 1992.

The interpretation of this paragraph means that for a “close” trading

company – a company with five or fewer participators – which begins to

carry on a business of holding investments, there is deemed to be a change

of activity by the company and, effectively, all previous credit periods

for the purposes of capital gains tax taper relief on the disposal of the

whole or part of the actual business will be lost.

The moment when the company makes its first inv- estment which falls into

this category, other than placing money on deposit after April 5, 1998, the

shareholders have to “go back to go” on the relevant CGT taper relief


According to the extremely difficult and complex piece of legislation

under discussion, the situation only pertains “at the time of disposal”,

so, presumably, if any such interruptive investment is disposed of by the

company immediately before exchange of contracts for the sale of the shares

in the company, then all such previous credit periods are reinstated for

the shareholders.

This is a matter of protracted correspondence between the writer and the

Inland Revenue but, at the time of writing, no final answer has been given.

The Revenue seems to be putting a different interpretation on “at the time

of disposal” than that outlined above (in its favour) but it is hard to see

how this could be justified.

Let us assume that the event of losing previous credit periods for CGT

taper relief has occurred, that is, the company has commenced the business

of holding investments but it has not disposed of the relevant assets prior

to exchange of contracts on the sale of company shares by the shareholders.

What is the effect?

Both the business asset and non-business asset taper tables were

originally legislated to be on the basis of a 10-year build-up of relief.

This is still the case for non-business asset taper relief (see my previous

article). But it could now be even more disastrous to fall foul of the

“substantial” part of the definition as outlined, not because non-business

taper relief has worsened but because of the proposal to greatly improve

business asset taper relief.

What is this all about? It has been proposed in the Budget and

corresponding press release dated March 21, 2000 that the period of

ownership to qualify for full business asset taper relief from April 5,

1998 reduces from 10 years to four years although, in this instance, the

“free” year for assets owned prior to March 17, 1998 will be lost.

This means that if shareholders&#39 business asset taper relief periods are

lost because of the company commencing the business of holding investments,

it will only take four full years of ownership from that commencement to

regain full business asset taper relief (if appropriate) and for the

shareholders to only be liable for CGT on 25 per cent of the realised gain

on disposal of the business.

Compare this with taking 10 years to regain non-business asset taper

relief resulting in CGT being paid at 60 per cent of the gain and it can be

seen how vitally important it is to get any advice given in this area

absolutely right (if this is possible as the Revenue seem to be


So, what is the business of making investments and how does this differ

from just making investments? Here, the Revenue refers to its booklet,

Capital Gains Tax Reform: The 1998 Finance Act, in particular paragraph

2.66. The following is an extract:

“The Inland Revenue would not, for example, regard the following (in

itself) as amounting to the business of making investments where they are

carried out by a trading company – using surplus profits to invest in

listed shares or securities where there is a reasonable possibility that

those funds may be needed to meet trading requirements, including major


How do you feel about advising your close trading companies to take a risk

on that?

As you can see, it is all very difficult but, for business asset taper

relief, the problem will be greatly reduced. It is surely now even more

vital than ever to try and ensure that this relief is available on the

disposal of the business rather than the less generous non-business asset

taper relief.


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