PRINT THIS PAGE Capital gains: taxing times07/05/2008. Source: Hurst Morrison Thomson, Livingstone Partners. Nick Byfield
When, in his first pre-budget report in October 2007, Chancellor Alistair Darling pledged to reform and simplify UK CGT, the move was warmly welcomed. However, he has since managed to alienate almost everyone affected. The most significant changes are the abolition of taper relief and the withdrawal of indexation allowance, writes Nick Byfield of accountancy firm Hurst Morrison Thomson, in this article in the Acquirer, the corporate finance magazine from Livingstone Partners. A single rate of 18 per cent will apply to the disposal of assets by individuals, trustees and personal representatives. The disposal of assets by companies is unaffected.
The backlash
The scale of the backlash is unprecedented. The main victims of the changes are entrepreneurs and employees who have held shares for at least two years: their tax burden will rise by 80 per cent. Other effects are more subtle, such as loss of the indexation allowance.
The concession
Following a cacophony of complaints, including criticism from the Treasury Select Committee, the Chancellor pledged to look at possible concessions. In January 2008, "entrepreneurs' relief" was announced, which provides a special 10 per cent rate for the first £1m ($2m) of qualifying gains. This will be a cumulative lifetime total of £1m, with gains in excess of this taxed at 18 per cent. The 10 per cent rate will be available to individuals or partners in a partnership on the disposal of all or part of a trading business. The relief will also be extended to individuals disposing of shares in a trading company, provided they are an officer or employee of the company and take a minimum five per cent stake.
Hope springs eternal
Among the winners are speculators holding assets in the short term, property investors, and pre-sale capital bonuses for employees. Available indexation can be captured in some cases by transferring assets to spouses, and the point of taxation can be accelerated for a forthcoming transaction into the 10 per cent regime, even where completion will occur after 6 April 2008.
The reaction
Ultimately, while the changes aimed to simplify things, we now have a system that differentiates and punishes serial wealth and job creators. Distinctions remain between trade and non-trade activities, and individuals with long-held assets are penalised, as are minorities in both small and large companies. Roll-over and hold-over reliefs remain virtually intact, along with remnants of the share matching rules. And there is tension between income taxation on the disposal of assets, where they are held to have been acquired by reason of employment (at up to 47 per cent) and capital gains tax at anything up to 18 per cent. Simple it is not.
This article originally appeared in The Acquirer, the corporate finance magazine from investment banking boutique Livingstone Partners.
Livingstone Partners specialises in cross-border company sales, acquisitions and private equity transactions with deal values ranging from between £10m and £100m plus. The firm has offices in the UK, continental Europe and the US. For more information go to www.livingstonepartners.co.uk.
Hurst Morrison Thomson is an accountancy and business advisory practice based in the UK. The firm specialises in advising management buy-in teams, UK-based businesses with aggressive growth plans or with shareholders aspiring to an exit as well as major subsidiaries of international PLC’s, clearing banks, venture capitalists and other institutional clients. For more information go to www.hmtgroup.com.
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