Casualties in ER
The adverse effect of the abolition of taper relief for capital gains tax (CGT) purposes for disposals on or after 6 April 2008 has been partially relieved by the introduction of Entrepreneurs' Relief. The use of the abbreviation ER is an unfortunate link to accidents and it is already clear that there are going to be casualties in this area.
The effects of ER
The relief works by reducing gains on qualifying assets by 4/9ths, leaving the balance of the gain taxable at 18%. By an amazing coincidence this gives a tax rate of 10%, the effective higher rate of CGT if an asset had qualified for full business taper relief.
ER may be available on gains of up to £1m over an individual's lifetime starting from 6 April 2008, so the impact of ER will be diminished once that limit is passed, whether on a single disposal or on a cumulative basis. The maximum ER which will be available is £444,444 (£1m x 4/9ths) and this means that the effective rate of CGT will climb towards, but will never actually reach, 18% for gains exceeding £1m.
The impact on commercial property
One particular area of concern is where an individual owns the premises from which a trader conducts their business. This might be their own business or a business run by an unconnected third party. Under the taper relief rules the gain on the disposal may well have qualified for some business asset taper. Under ER the disposal may not qualify for relief at all.
If the property has been used by the individual's own company and they sell the property at the same time as they sell the shares in the company, then ER may be available. A similar result may arise if the property has been used by a partnership of which the owner is a member. In either case, the sale of the property must occur as part of the individual's withdrawal from the business carried on by the company/partnership. In both cases the impact of ER may be heavily diluted if the property has been rented to the company/partnership at a market value rent.
In situations where the property has been let to unconnected parties ER will simply not be available and the full gain will be taxed at 18%. Without the benefit of indexation, which is also withdrawn for disposals by individuals and trustees on or after 6 April 2008, there could be a major increase in the potential CGT due on any future sale.
There are now different issues to consider if you are planning to purchase new premises for your business and, as well as the CGT issues, it is also important to consider the availability of Business Property Relief for inheritance tax purposes.
We are happy to advise you on these matters.
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