Owners of shares qualifying for business assets taper relief have long
looked forward to April 6, 2002 as a key date.
From that time, the full 75 per cent taper relief will apply for those
shareholders who have held shares for four years, the commencement of this
favourable regime having been in 1998.
Many sales of private companies will have been planned so as to defer the
effective date of disposal until after April 5, 2002.
A 10 per cent effective rate of capital gains tax for a higher-rate
taxpayer is certainly worth waiting for. This may well have caused many to
simplify more intricate disposal plans that may otherwise have been
considered to defer or avoid paying capital gains tax.
The lower the effective rate of tax, generally speaking, the lower is the
incentive to avoid it. This would undoubtedly have been in the mind of the
Government when implementing these changes.
The Chancellor has proposed further relaxations to business assets taper
relief in his recent announcement of further reviews to encourage
enterprise and entrepreneurship. Under these proposals, individuals
disposing of qualifying shares after April 5, 2002 may well have an even
shorter waiting period to qualify for business assets taper relief.
The proposal is to reduce the holding period to qualify for 75 per cent
taper relief to two years. There may also be a further relaxation of the
conditions on qualifying assets to broaden the range of investors who
Already, as a result of previous changes, all holders of shares in
unquoted companies, including those quoted on the Alternative Investment
Market, employees in quoted companies and non-employees with a minimum 5
per cent holding in quoted companies qualify for the relief provided the
company is a trading company.
A further relaxation in this year's Finance Act means that certain
employees in non-trading companies are eligible for business assets taper
relief on shares in the company where they work.
These relaxations mean that not only most owners and directors but also
most employees (and a significant number of investors) can qualify for the
accelerated taper relief. When you add taper relief to the new Enterprise
Management Incentives scheme, an extremely tax-attractive package can
EMI is the new breed of share-option scheme designed to help companies
attract and retain staff. The Chancellor has announced that the scheme will
be further improved so that, subject to consultation, companies with gross
assets of up to £30m, compared with the current £15m, will
qualify for the scheme. The ownership period for shares acquired under the
older share-option schemes commences when the option is exercised whereas,
under the still comparatively new EMI scheme, ownership for taper relief
operates from the date the option is granted.
It is essential that those advising on or providing products for
businesses are fully aware of these proposals. There may be some employers
who are interested in using share schemes as some kind of pension
alternative due to the substantial income tax and capital gains tax
attractions, together with the fact that benefits can be taken wholly in
While share schemes can provide tax-attractive benefits, it must never be
forgotten that to concentrate too much of one's wealth and future financial
well-being in the shares of one company – especially if it is a private or
Aim-listed company – represents a relatively high-risk strategy.
Where the shares are in a private company, there is also the fundamental
question of how the benefits of share ownership are to be realised in the
absence of a market in the shares.
Finally, the proposals to further improve business assets taper relief
makes qualification for it of even greater importance. Consequently, the
potential impact of investments on qualifying company status (addressed by
the latest Inland Revenue Tax Bulletin) is extremely significant.