Mark Kirkbride & Co Limited
Current Articles of Interest
Taper Relief
Taper relief has been with us for over 3 years now and various Finance Acts have introduced major changes to the relief since its inception. Now is therefore a good time to review the major facets of the relief and to highlight some problem areas.
The relief seeks to reduce the amount of capital gains tax payable when an asset is disposed of depending upon the length of time the asset has been held since March 1998. The longer the holding period the greater the taper is the general rule. However there are two different rates of taper relief - one for business assets (up to 75% of the gain) and one for non-business assets (up to 40% of the gain). The rules can get complicated when trying to decide whether you have a business asset or a non-business asset. In some situations this may require an apportionment of the gain before taper relief between the business period and the non-business period. This in itself can produce some quirky results.
Take for example, Tom, who sells shares in an unquoted trading company on 6 April 2004. He has held these shares from 6 April 2000 and the gain before taper is £50,000. He holds less than 25% of the share capital and is not involved with the management of the business on a full-time basis. Following the changes made in this years Finance Act, Tom's shares will be a business asset and he will get the maximum amount of taper relief of 75% on a disposal on 6 April 2004. Being a higher rate tax payer he will pay at most £5,000 tax.
And now we turn to his brother George who also holds 20% of the shares in the same company. The Only thing is that he has held his shares much longer since 6 April 1994. Again he is not involved in the business on a full-time basis. He too makes a gain of £50,000. To the layman one would expect George to be the better position as after all the whole point of taper relief is to reward long-term ownership of assets. This though is not the case. The £50,000 gain is apportioned between the non-business asset use period (the 2 years from 6 April 1998 to 5 April 2000) and the 4 year business asset use (from 6 April 2000 to 6 April 2004). In other words 1/3 of the £50,000 gain does not qualify for the higher rate of relief. In fact George ends up paying £8,333 of tax. Such a result is absurd but is what the law states.
The above example highlights one of the recent changes to the rules. Shares in unquoted trading companies will now qualify for the business asset rate of relief without being reliant upon a certain minimum percentage being held. This will certainly improve matters and will help avoid inadvertent loss of relief that could have happened where in the past an individual makes of a gift of some of his or her shares to the spouse who previously did not meet the necessary qualifying conditions.
The business asset rate of relief is now available after 4 years ownership and not 10 years. One may be forgiven for thinking that such an act of generosity will have an immediate marked impact for disposals after 5 April 2000. This is not necessarily so. Under the old rules a disposal of a business asset in the year to 5 April 2001 that had been held before 16 March 1998 would have qualified for 2 years of relief, plus a bonus year as it was held at 16 March 1998. The relief would have been 22.5%. The new rules 'consolidate' the bonus year. Therefore the disposal will now actually attract 25% relief which is only marginally better than under the old rules. It is not until after 5 April 2001 that the new rules really begin to make a difference as at that point the relief increases to 50%.
It is also worth highlighting some of the problems with the relief that the Chancellor has not chosen to do anything about thus far and indeed may never intend to do anything about.
The higher rate of business asset taper relief only applies to a disposal of company shares where the company is a trading company (or a holding company of a trading group) or if there is any non-trading purpose then this must have no substantial effect on the extent of the company's activities. What does this mean ? There is no definition of what 'no substantial effect' is, and the Revenue have indicated that 'substantial' may be 20%. However they do not say 20% of what and only say this will depend upon the circumstances. However simply having cash on deposit seems unlikely to breach the rule. However receipt of rental income could be regarded as having a substantial effect. Therefore there will be many company situations where the shareholders believe they may be entitled to the higher rate of business asset relief who may, one day, have a very nasty surprise. This sort of issue is particularly relevant to the completion of self-assessment tax returns. How can taxpayers be expected to complete
returns if there are no clear rules on key matters such as this ?
There are other bizarre situations. Consider Mr Haymaker a farmer. He has some redundant barns on his land no longer being used for agricultural purposes. The farm is regarded as one asset for capital gains tax purposes. He could let them out or he could simply leave them vacant. What would be the effect on taper relief?
If he left them empty he is rewarded in that he will continue to get taper relief at the business rate on the farm. If he lets the barns out Mr Haymaker's taper relief on a future disposal is likely to be restricted. Mr Haymaker suggests he would like to allow a local charity to use the barns rent free. Again taper relief could be restricted.
There are other situations where taper relief is not what may be expected. Take Acme Enterprises Limited. This is a very successful company with a good trading business. After several years the business is sold out of the company on 6 April 2002. The company invests the cash for two further years and then is liquidated. What is the taper relief position upon liquidation? Again the layman may say well full relief should be available on the basis that the shares are a business asset. But for the last two years of ownership the company has not qualified as a trading company. In this case one might expect there to be a restriction. In particular 2 years out of the 6 years of ownership from 6 April 1998 may not qualify as a business asset. But the truth is that it could be worse than this. There may be no taper relief at all. The problem is that the Revenue may say the company's activity changed when the trade was sold. In this case there is anti-avoidance to deny all taper relief up to that point and the clock is reset at zero. As the company was then liquidated only 2 years later no non-business asset taper relief would have accrued in the period.
There are further problem areas we have come across including :
Trustees trading in partnership are not entitled to the higher rate of business relief.
Possible problems with company takeovers where loan notes are received.
The possible impact of anti-avoidance legislation to situation involving company shares to essentially convert a capital gains tax charge to an income tax charge in situations where planning is undertaken to take advantage of the capital gains treatment and therefore taper relief.
One can begin to see the complexities and there are others. There are likely to be many taxpayers and their advisors who get caught out by these rules. There are likely to be time bombs ticking away as I write. So if in doubt consider your situation now and ask for professional advice before its too late. Be particularly careful before changing your current trading or business patterns as this may impact on future reliefs. Other professional firms should be very clear about their responsibilities for taper relief. It would seem sensible to discuss such matters with client's at an early stage and ask if client's wish their taper relief position to be fully reviewed, and if not that they accept the accountant can give no assurances as to the likely availability of the relief.
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