One of the most confusing pieces of legislation to have been introduced in the recent past is that relating to the interactions between business assets taper relief and non-business assets taper relief for capital gains tax purposes.
It is important to get to grips with these reliefs if you, as a financial adviser, are talking to clients who may work for large public companies and have been given some of their overall remuneration packages in the form of share options under an approved share option scheme.
This becomes important because of the proposal in the recent Budget that all holdings in non-trading companies where the holder does not have a material interest (bro-adly a 10 per cent interest)can become business assets for the purposes of CGT taper relief. This applies for disposals on or after April 6, 2000 and so is a “backdated” advantage.
The date April 6, 2000 also ties in to the changes where all holdings held by employees in quoted trading companies became eligible for business assets taper relief on disposal.
There were one or two other changes to what became eligible to business asset taper relief also at that time and a full list of such eligible holdings is broadly:
All holdings held by directors and employees in unquo-ted trading companies.
All holdings held by employees in quoted trading companies.
Holdings in a quoted company where the holder is not an employee but can exercise. 5 per cent of the voting rights
All holdings in non-trading companies where the holder does not have a material (10 per cent) interest.
A number of rather technical problems arise from the change in category for the relevant asset which applies from April 6, 2000.
First, to be eligible for business assets taper relief (only paying CGT on 25 per cent of the gain on disposal after four complete years of ownership) the owner has to still be an employee of the relevant company at the date of disposal.
Second, if an asset which was owned by a qualifying holder because of the change in the law became a business asset as at April 6, 2000 – having previously been a non-business asset for CGT taper relief prior to that date – then the gain and ultimate disposal will need to be apportioned between non-business assets and business assets. For taper relief purposes, this will ensure that the correct part of the gain acquires the correct level of taper relief.
The non-business assets taper relief table is, of course, much less favourable as the best result that can be achieved is paying CGT on 60 per cent of the gain only if the asset has been owned for 10 complete years prior to the date of disposal.
There is a further complication in as much as, for the apportionment calculation of the gain to decide which taper relief table to apply, part years of ownership count. For the actual taper relief table it is complete years of ownership only that count.
Add in the even further complications of the fact that if the asset was owned prior to March 17, 1998, for the non-business assets taper relief table there is a “free year” – the year prior to April 5, 1998 – whereas for the business assets taper relief table there is not. The whole system is a recipe for disaster.
But that isn't all. What about, for example, the shareholder/employee of a public limited company who does not dispose of his shares until after he retires or leaves the company? At that point of time he is no longer an employee of the company so the non-business assets taper relief table will apply.
The profile of his shares could be – elected share option prior to March 17, 1998, from April 6, 1998 the non-business assets taper relief table would apply until April 6, 2000, then the business assets taper table takes over until he leaves/retires – then the non-business assets taper relief table takes over again.
Two lots of apportionment need to be dealt with and different taper relief tables will apply at different times.
Why is this important? Share options have become big business for employees over the last few years and some of them have substantial shareholdings acquired over the years. This could become money for reinvestment but all the above factors need to be considered.