TT37: Business Asset Tax Relief

“Entrepreneurs threaten to quit UK over stealth tax” – that’s what was written in The Times on 26th March in respect of a perceived new attack on Business Gift Relief by the Inland Revenue. The theme has been much replayed elsewhere. However, for the majority of owner-managed businesses, such drastic action is far from necessary, or even realistically possible.

The background

There are several reliefs from Capital Gains Tax (“CGT”) or Inheritance Tax (“IHT”) that are available, but they can only be claimed where the underlying assets are “business assets” or the company is a “trading company”. It is therefore vital to have matters organised appropriately to take advantage of them. The most important are: Business Asset Taper Relief (for CGT on disposals or sales); Business Property Relief (for IHT); Gift Relief (for CGT on gifts).

As far as a trading company is concerned, the value of its shares reflects the value of a collection of underlying assets, some of which might be investments. So how should a “business” orientated tax relief apply in such circumstances? Will the investments poison the relief completely, partially or not at all? A further problem is that, historically, different definitions of “business asset” have applied for the purposes of different reliefs.

The change (from 6th April)

Since its introduction in 1998, CGT Taper Relief has used an “all or nothing” approach to company shares – they either are, or are not “Business Assets”. A small amount of investment activity does not cause any loss of relief but a substantial amount of investment activity causes it to be lost completely. Similar rules have applied for the purposes of IHT Business Property Relief.

However, the rules for the purposes of CGT Gift Relief have historically been different. Here, the existence of investment assets has always caused the relief to be apportioned and due to the nature of this calculation, a small amount of investment assets could cause a large loss of relief. These rules have long been a trap for the unwary.

The change from 6 April 2003 is to bring the rules for CGT Gift Relief into line with those for CGT Taper Relief. Since then, no apportionment of the relief has been required; instead the all or nothing approach must be taken. The article previously referred to suggested that this would increase the capital tax burden on entrepreneurs, but the reverse is probably true. Those that would have suffered a disproportionately large reduction in their CGT Gift Relief might now qualify for it in full. Now, if shares in companies qualify as Business Assets for CGT Taper Relief purposes, they will also fully qualify for CGT Gift Relief.

Barnes Roffe Topical Tips

  • If you wish to gift shares in your trading company to family members or a trust, then you can avoid paying CGT by “holding over” the gain as long as the company’s investment activities/assets are less than the de minimis limit. Under the old rules, even very small investments held by the company could have led to the relief being severely curtailed.
  • If you wish to gift shares in a company above the de minimis limit, you can still avoid paying CGT by gifting the shares to a discretionary trust (for example in favour of your family). There is a restriction on the total value that can be thus transferred (i.e. the nil rate band for IHT of currently £255,000) but any gains on a gift that is notionally chargeable to inheritance can again be “held over”, albeit under a different statutory provision.
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