The proposed improvements to taper relief for business assets will
probably engender some excitement among business owners “with a view to a
sell” – to use Bond (that's James, not investment) phraseology.
But if business owners believe the improvement in taper relief adds to the
credence of the argument that “my business is my pension”, they should be
reminded that a CGT only arises if a disposal takes place.
The most important argument against relying entirely on one's business to
be the font of all financial security in retirement is the risk attached to
such reliance. What if demand for the business diminishes at the time the
sale is to take place? What if technological development takes away the
market for the business? What if the owners are in ill-health, which
impacts on the business?
What if the economic cycle is in downturn and there are just no buyers and
insufficient value? Even if there are, it should be borne in mind that
those selling on an “earn-out” basis may be entitled to less taper relief
than they might expect on any gain made when the initially unascertained
consideration becomes payable at the end of the “earn-out” period.
While one should not deny outright that a business could produce the
financial security required by an individual in retirement, there is
clearly always a risk that it may not.
This does not mean businesses should be structured to stand a greater
chance of building capital value – on the contrary. However, the owners
should be encouraged to put in place a fund comprised of an appropriate
investment portfolio with appropriate wrappers.
Another impact that the new taper relief proposals may have is that there
may be less enthusiasm for some of the more convoluted pre-sale schemes for
avoiding CGT on substantial in-built capital gains.
The Government has recognised the continuing interest in such schemes and
one of its other proposals (in this case, taking effect from November 9,
with legislation being introduced in the next Finance Bill) is to prevent
the abuse of the Section 165 TCGA relief for holdover of gains on transfers
of shares to companies.
This does not mean there are not other schemes available that individuals
may consider, just that this particular one has been closed down.
The introduction of both CGT proposals – one making taper relief more
attractive and introducing an effective 10 per cent CGT rate in respect of
gains made on disposals of qualifying business assets after five years'
ownership and the other clamping down on tax avoidance – have a kind of
alignment. It is arguable that, for some, if the effective CGT rate is as
low as 10 per cent, there may not be such great motivation to enter into
relatively complex and sometimes uncertain avoidance arrangements. Of
course, the higher the stakes, the greater the likely enthusiasm for
entering into such arrangements.
Turning to other pre-Budget proposals, there is the extension of the 10
per cent rate of income tax to savings. This could bring an improvement in
net income to those with income falling within the £1,500 band assessable
at 10 per cent. Up to £150 is up for grabs.
However, most beneficiaries of this reduction will have deposit interest
within this band which will be received net of 20 per cent tax. It will
thus be necessary for a reclaim of the over-deducted 10 per cent to be
made. For those with income already assessed at rates above 10 per cent,
this change will clearly do nothing.
This reminds me that, far from having a very simple two-tier system of tax
rates, there are an apparently increasing number of tax rates in the UK.
There is a 10 per cent rate applicable to earnings and savings income, a
10 per cent tax credit on dividends, the 23 per cent basic rate (reducing
to 22 per cent next year), the 25 per cent rate payable by trustees of
discretionary trusts on dividend income received with a 10 per cent tax
credit, the 32.5 per cent rate paid by higher-rate taxpayers on UK
dividends with a 10 per cent tax credit, the 34 per cent rate payable by
trustees on capital gains and non-dividend income and the 40 per cent rate
payable by higher-rate taxpayers on non-dividend income. All these rates
ignore, where appropriate, National Insurance charges.