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Share exchange is no robbery

Last week, I continued my evaluation of the Budget changes to taper relief for business assets by working through an example which addressed two important issues:

Where the period of ownership spans both the new and the older, more restrictive ownership rules.

Where the assets satisfy the business assets test for some of the period of ownership but not for the rest of the period.

Similar issues will arise in cases where there is a share-for-share exchange. An obvious example of this is where a private business is sold by the owners to, say, a listed company with part or all of the purchase price being satisfied by shares in the listed company.

There may be many reasons for this structure but usually there is a desire for tax deferment and now there may be a wish to extend the period of qualifying ownership for taper relief.

If such a share exchange is properly structured, no immediate capital gains tax liability will arise because of the share exchange rules in section 135 and sections 127-132 TCGA 1992. If the shares owned by the taxpayer before the exchange qualify but the shares owned after the exchange do not, it is necessary to consider apportioning the gain in accordance with the relevant period of ownership which, in this case, will cover the total period of ownership of both sets of shares.

Clearly, in private company sales founded on such a share-for-share exchange, subject to commercial and other non-tax considerations, the individual involved will strive to ensure that the shares acquired through the exchange also qualify for taper relief under the new rules. In this respect, employment by the company or a related business will be important.

In cases where, during the complete period of ownership of an asset, it is owned for some of that time as a business asset and for the rest of the time as a non-business asset, it is not necessary to reduce the period of ownership for taper relief purposes. Instead, the appropriate part of the gain that qualifies for business asset taper relief or non-business asset taper relief is apportioned according to the actual ownership periods of the assets.

Those who are considering disposing of their business assets will be greatly encouraged by this increased relief. For somebody selling a business and realising a capital gain of 1m, this can involve a tax saving of 300,000. For a person not currently entitled to any retirement relief, it could mean almost a doubling of the relief available.

It will be important for the adviser to at least have a working knowledge of these new rules so that they can talk constructively to business-owning clients.

Of course, while these changes are to be welcomed, such tax planning will always be subject to commercial reality. Buyers do not always wait for the most tax-advantageous time to make their offer.

In the light of these proposals, it may well be that the argument often advanced against making any significant pension provision – that an individual&#39s business will be his or her pension – will be further strengthened. From a tax standpoint, this may well be so but it must be borne in mind that, before one can qualify for tax reliefs, however valuable, an individual must find a buyer for the business.

There are many reasons why a sale may be difficult just at the time when funds are required. For example, there may be a weakened market for the goods or services offered by the business. It may be that no buyer can be found and it may be that the whole economy is in a period of downturn when acquisitions are not being made.

Individuals running and developing small businesses ought to be encouraged to at least hedge their bets by providing for long-term financial security which is independent of the business.

The effective building of such a security fund depends on good long-term investment performance. Subject to this, the individual and his or her advisers should look carefully at selecting the correct wrappers for the investments. Such wrappers should include some or all of approved pension arrangements, Isas, unit trusts and other collective and insurance products.

Of particular interest to those seeking to build long-term capital growth may be the taper relief rules applying to investments. While no changes have been made to enhance the taper relief available to investments, the effective rate of tax for a higher-rate taxpayer on gains made under investments qualifying for full taper relief is 24 per cent.

It should also be remembered that taper relief operates before the application of the annual exemption. This can have the effect of stretching the amount of exempt gains even further.


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