Of all the changes to taxation introduced in this year's Budget, the most
exciting for business owners, employees and directors with a shareholding
in the company for which they work will be the taper relief provisions for
The proposals for dramatically improving taper relief have now been
embodied in clauses 65 and 66 of this year's Finance Bill, including:
Shortening of the taper relief period for business assets from 10 to four
Removal of the bonus year of ownership for those who owned qualifying
business assets on March 16, 1998, which means the ownership period to
qualify for taper relief will now run from April 6, 1998.
A reduction in the number of voting shares an individual needs to hold to
qualify so that all shareholdings in unlisted trading companies, all
employee shareholdings in listed trading companies and shareholdings of at
least 5 per cent held by outside investors in listed trading companies will
qualify as business assets.
All employees, not just full-time, benefit from the changes. Unlisted
companies are defined as those which have no shares or securities listed on
a recognised stock exchange. Shares traded on the Aim are treated as
unlisted. The changes apply to disposals after April 5, 2000.
One of the most important improvements is that taper relief for business
assets will operate over a four-year period rather than the 10-year period
of ownership that applied previously. For an asset held for one year, 87.5
per cent of the gain is chargeable. For periods of two, three and four
years, the percentage of the gain that is chargeable is 75, 50 and 25 per
But the proposed changes have raised a number of issues. Do the new rules
apply to periods of ownership from April 6, 1998 to April 5, 2000 or do the
previous, more restrictive rules apply for this period?
What happens if an individual owns an asset which satisfies the business
asset test for some of the period of ownership but not for the rest of the
period? How do the taper relief rules for non-business assets (which still
apply over 10 years and give a bonus year for assets owned on March 16,
1998) fit in with the business asset rules?
Some clarification has been given by the Inland Revenue. I believe the
best way to understand this is to look at a simple example. Let's take the
case of an employee of a listed company. He purchases shares in that
company in, say, 1997, is not able to exercise 5 per cent or more of the
voting rights in the company and disposes of the shares on September 20,
First, it is important to determine the qualifying holding period. In this
case, it runs from April 6, 1998 to September 30, 2002. In that period,
there are four complete years for taper relief purposes. If the asset is a
non-business asset, it qualifies for a bonus year but, as a result of the
proposed changes in the Budget, from April 6, 2000, these shares qualify as
business assets. This will not affect the qualifying holding period.
It is then necessary to consider the relevant period of ownership (para 2,
sch A1 Taxation of Chargeable Gains Act 1992). This will be the shorter of
the period after April 5, 1998 for which the asset has been held at the
time of its disposal and the period of 10 years ending with the disposal.
In the example above, the relevant period of ownership is April 6, 1998 to
September 30, 2002. For the period to April 5, 2000, the shares are not a
business asset under the test that then applied but they are under the new
As the shares have been a business asset for part of the period of
ownership but not the other part, if the gain on disposal is £54,000, part
of the gain will relate to a business asset and part to a non-business
asset apportioned on a just and reasonable basis according to the relevant
period of ownership. The relevant period of ownership is 54 months and the
non-business asset period is 24 months.
On this basis, £24,000 is taken as a gain on a non-business asset. In this
respect, there are four years in the qualifying holding period plus the
bonus year, so there is 15 per cent taper relief. Thus, 85 per cent of this
part of the gain is chargeable.
The balance of the gain (£30,000) relates to a business asset. Here, there
are four years in the qualifying holding period and, subject to the
proposed taper rules being enacted, there is 75 per cent taper relief, with
25 per cent of the gain being chargeable. More on this next week.
The recent setback in technology shares has brought down the good shares
together with the more speculative ones.
So there are now some bargains in the unit trust field where experienced
managers are picking up shares at value prices.
A fund which has impressed me is ABN Amro UK growth. It invests in a
variety of growth companies, both smalland big, with quitea large exposure
to the technology sector, mainly in the software and computer services
It also includes undervalued shares such as Budgen and Johnson Matthey.
The fund is now around 23 per cent below its all-time high but is only
down by around 5 per cent over the past three months and is still one of
the top performers over the past five years with profits of around 250 per
Nigel Thomas, who manages the fund, has made it so successful by switching
between smaller and bigger companies at the right time.
Another trust I have noticed is Aberdeen European technology which has
fallen by 27 per cent from its all-time high but again is up by well over
200 per cent over five years and down by only 6 per cent over three months.
The manager, Ed Protheroe, is a great believer in telecom shares such as Nokia and Ericsson, both leading mobile phone providers.
He believes the European economic recovery should continue to gather
momentum as computer spending remains robust, investment spending picks up
in line with improved business confidence and exports continue to increase
a global growth combines with the competitive euro.
In the majority of cases, European technology shares remain at a
significant discount totheir US equivalents.