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Sounds all right on taper

You will recall (I hope) that last week I was looking at the subject of capital gains tax business assets taper relief in connection with corporate investment.

My reason for addressing this issue is that in the excitement (wrong choice of word, perhaps, but you know what I mean) surrounding the anti-avoidance provisions on capital redemption bonds, the impact that any investment can have on business assets taper relief may have been forgotten. So, when advising a private company on any investment, it is worth knowing the fundamentals of business assets taper relief.

The Finance Act 2003 widened the scope of business assets taper relief for assets other than shares for periods of ownership after April 5, 2004 and in respect of disposals that take place after April 5, 2004. However, the old rules continue to apply to periods of ownership before April 6, 2004.

The favoured position of assets in unlisted companies has been recognised by the Inland Revenue and extended to unincorporated businesses. For periods of ownership from April 6, 2004, where the disposal of an asset is made by an individual, the trustees of a settlement or an individual’s personal representatives, that asset will qualify as a business asset if it is used wholly or partly for the purpose of a trade carried on by:An individual or any partnership which has an individual as a member.The trustees of any settlement or any partnership whose members include any person acting in the capacity of a trustee of a settlement.The personal representatives of any deceased person or any partnership whose members include any person acting in the capacity of a personal representative.

It should be noted from the above that in order to qualify for business assets taper relief, an asset used in an unincorporated business will no longer have to be used in a trade carried on by the individual, etc, who is making the disposal or in an unlisted trading company.

Also included in the new definition are assets used for the purposes of a trade carried on by:A partnership whose members include a company which is a qualifying company by reference to the asset’s owner.A partnership whose members include a company which belongs to a trading group whose holding company is a qualifying company by reference to the asset’s owner.

For an individual, for example, a qualifying company is an unlisted company or a listed company in which the individual is an employee or able to control at least 5 per cent of the voting rights.

The rules as regards assets used in a trade carried on by a listed company are unchanged, which means the company has to be a qualifying company of the owner of the asset. This means the favoured treatment afforded to assets used by unlisted companies has been extended to sole traders and partnerships but not listed companies.

Private companies sometimes have cash on deposit that is not needed for immediate business purposes. In these circumstances, the directors of the company may wish to consider alternative ways in which they can invest to achieve tax-efficient growth that can be accessed at a later date by the company to develop its business.

In such a case, subject to being suitably satisfied that an improved return can be secured either by investment performance, tax saving or a combination of both, and that the charges are reasonable, some may consider (especially in light of the new anti-avoidance provisions on capital redemption bonds) an offshore single-premium bond. Such a wrapper is non-income producing, providing tax deferment and administrative simplicity. It can be asset-backed and therefore likely to produce capital growth over the medium to long term. Ưntrol can be exercised over the date of encashment and, therefore, the time of the tax charge.

Chargeable event gains arising on encashment will normally be fully subject to corporation tax under Case VI Schedule D unless certain pre-encashment strategies can be adopted. For this reason, bonds with UK insurance companies would not be appropriate because the company would receive no credit for the lower rate tax suffered within the investment fund when assessing tax on any chargeable event gains. Offshore bonds will offer more tax-efficiency, giving largely tax-sheltered growth.

So, all well and good. However, following the introduction of taper relief in 1998, one issue that has arisen in relation to a company making an investment-backed (not business asset) investment is whether this will have any detrimental impact on taper relief on disposal by the shareholder/director of shares in the company. For any company considering an investment of this nature, it is essential that they seek advice to ensure business assets taper relief is not inadvertently prejudiced.

Two situations need to be considered:Will the investment have a substantial effect on the company’s activities?Will the company, if it is a close company, begin to carry on a business of holding investments?

I will look at these in turn starting next week.


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