TT2: Taper Relief is What You Need

As any businessman knows, the time when you make real money from your business is when you sell it. Obviously there are lots of issues to consider in connection with the sale process: How much will you get? When should you sell it? etc., etc.

Another important consideration is of course how much tax you will pay on the sale. The 1998 budget changed completely the way that such sales are taxed. That budget introduced taper relief, which can be good news.

You will want the shares in your company to qualify as business assets for taper relief purposes. If they do, and you own your shar es for more than 4 years or sell after 5 April 2002 (whichever is the later) your effective rate of capital gains tax will be only 10%. This rate applies irrespective of the size of the gain involved and you can claim taper relief any number of times.

Non-business assets also attract taper relief but the lowest effective rate of tax that can apply to these assets is 24%. And maximum relief on these assets is not available until 6 April 2007 at the earliest (assets acquired after March 1998 have to be owned for 10 years to get maximum relief rather than the period of 4 years that applies to business assets).

The message is you must ensure that the shares in your company qualify as business assets.

Are your assets eligible?
The rules are complex and you should seek specialist advice from your contact partner concerning this issue. However, in general terms, the shares in non-quoted companies that are substantially trading will qualify as busine ss assets. The question is what is substantial. Taper relief is relatively new and we have no legal precedent that we can use to test the meaning of substantial.

The important point to bear in mind is that that if you have a successful trading company you must consider carefully whether the company should invest in non-trading assets e.g. investment properties, stocks and shares, investment bonds etc.

It would be most unfortunate if such investments caused the shares in the company to be non business assets for taper relief purposes as this could more than double the tax bill on the sale of the company. In the case of closely controlled companies, the position could be even worse because the existence of an investment business could cause taper relief to be lost completely.

Barnes Roffe Topical Tips

  • Make sure the shares in your trading company qualify as business assets.
  • If your trading company has surplus assets to invest, speak to your contact partner before taking action. Such investments are possible but must be structured correctly.
  • Continue to review changes or developments with this important tax relief.
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