Planning ahead for CGT relief

JAMES SKELLORN of law firm Barker Gotelee explains how good planning can mitigate the Budget increase in Capital Gains Tax

NOW we have had time to consider the emergency Budget and the changes to Capital Gains Tax (CGT) rules, entrepreneur relief has become the most important factor in trying to reduce CGT when you sell a major asset.

We all flinched at the prospect of CGT rates going up to 40% or 50% and then relaxed a little when they were only increased to a maximum of 28%.

The bad news is that we are back to a regime where capital gains are taxed as the top slice of our income, albeit the actual tax rate applied to a capital gains is 18% or 28% depending on whether the gain falls into our lower or higher income tax rate band.

Simple? It means we cannot work out how much CGT we will pay unless we know how much income we will have in the year in which we realise the gain.

For a major sale of an asset realising a big gain, entrepreneur relief is crucial. If the relief is available it reduces the rate of tax to 10% rather than 28%.

Since entrepreneur relief came in 2008, it has always been based on a lifetime allowance and this has now been increased to �5million. Hence the maximum tax saving that could be achieved if entrepreneur relief is available is �900,000.

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The key thing with entrepreneur relief is to plan ahead.

The business needs to be structured correctly for at least one year before the sale to maximise relief.

The relief is available on the sale of the whole or part of the business owned by an individual. It needs to be a trading business and not a business primarily involved in investment.

If it is a company you must hold at least 5% of the shares and be a director, company secretary or an employee of the company for one year prior to the sale.

All of the conditions for the relief involve traps which can be avoided with careful planning.

One major trap is that the sale of many businesses actually involve the sale of the assets used in the business rather than the sale of the business as a going concern.

The sale of an asset used in a business will not normally get relief except if it is associated with the seller retiring or withdrawing from participation in the business.

However, HM Revenue & Customs has indicated that complete retirement from the business is not required to qualify for relief under this heading.

The disposal just has to be related to the reduction in the seller’s interest in the business. Strict time limits apply, so if you are planning the sale of a business or a major business asset, get good tax advice now to see whether you will qualify for this most valuable relief.