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The business is not enough

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&#39s 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&#39s 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&#39


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.

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