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Taper chase

In the last two weeks, I have looked at capital redemption bonds and the proposed legislation bringing such policies within the loan relationship rules. These give rise to the possibility of year-on-year tax charges rather than the more usual deferment of any tax liability until a realisation of gain takes places under the life policy taxation provisions.

The new provisions are intended to prevent CRBs being used to create losses that could reduce a company’s corporation tax liability but they also prevent corporate tax deferment through CRBs.

For those seeking tax deferment – provided the underlying investments, performance and charges are acceptable – an ordinary offshore single-premium bond effected on a multi-lives-assured last-survivor basis might be worth considering. Any private company making any investment must only do so after giving due consideration to the impact that such an investment could have on capital gains tax business assets taper relief.

Given that the application of this relief can reduce the taxable capital gain on a sale of qualifying business assets, including shares in a trading company, by 75 per cent after only two years – resulting in an effective CGT rate of 10 per cent for a higher-rate taxpayer – it is not to be given up lightly. Making any investment could do just that.

Bearing in mind the favourable treatment of business assets over non-business assets, it is not surprising that additional conditions have to be satisfied to qualify for the higher rate of taper relief applying to business assets.

All chargeable assets are taken to be non-business assets, unless the qualifying conditions for business assets are met in the particular case concerned (paragraph 3(4) Schedule A1 TCGA 1992). Further, the qualifying conditions for treatment as a business asset must have been satisfied for some period of time after April 5, 1998. Business use of an asset prior to April 6, 1998 is irrelevant for taper relief purposes. When the legislation was introduced in 1998, a business asset for taper relief purposes was defined as:Shares in a qualifying company held by the individual. There is no requirement that the company be a UK company or that it carries on its trade in the UK.An asset used for the purposes of a trade carried on by the individual, either alone or in partnership, or by a qualifying company of that individual.An asset held for the purposes of a qualifying office or employment to which that individual was required to devote substantially the whole of his time.

These rules, with appropriate modifications, apply also to trustees and personal representatives and have been modified over the years.

The word “purposes” forces one to look also at the future as it has a sense of intention. As well as looking at a stated intention, one can identify the purpose from the present and past situations, that is, what the company is doing now and what it has been doing. For example, a company may say it intends to carry on a trade but in the meantime it is lying back and receiving bank interest. In this case, the company exists for a purpose other than that of carrying on a trade. Where there is no intention, there can be no purpose.

Under paragraph 6 Schedule A1 TCGA 1992, a company will be a qualifying company if it is a trading company or the holding company of a trading group. For periods before April 6, 2000, for shares to qualify as business assets, the shareholder has to have been able to exercise at least 25 per cent of the voting rights or at least 5 per cent of the voting rights and be a full-time working officer or employee. From April 6, 2000, these rules were relaxed. All shareholdings in unquoted trading companies and all shareholdings of employees in quoted trading companies now qualify for business assets taper relief .

Shareholdings held by outside investors in quoted trading companies which carry at least 5 per cent of the voting rights will qualify as business assets. Unquoted companies for this purpose are defined as those which have no shares or securities listed on a recognised stock exchange. Shares traded on the Aim are treated as unquoted for this purpose.

Also from April 6, 2000, business assets taper relief can be available to shareholdings of employees, including part-time employees and officers, of non-trading companies provided they do not have a material interest in the company.

A person would have a material interest if he or she held or was entitled to acquire:More than 10 per cent of any class of share or security of the company.More than 10 per cent of voting rights in the company.A right to more than 10 per cent of the profits of the company that are available for distribution orEntitlement to more than 10 per cent of the assets of the company on winding up or in other circumstances.

For this test, the rights of connected persons, such as a spouse, relatives and certain trusts and companies, would be added to the individual’s rights.

Those considering a disposal of their business assets will be encouraged by this relief. For somebody selling a business and realising a capital gain of 1m, this can bring a tax saving of 300,000 over the liability that would have resulted if no business assets taper relief were available. It is important for the adviser to have at least a working knowledge of taper relief so they can talk constructively to business owners.

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