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Taper chase

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

qualify.

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&#39s 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

emerge.

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

cash.

While share schemes can provide tax-attractive benefits, it must never be

forgotten that to concentrate too much of one&#39s 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.

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