Posted 24 January 2008
Beware the Chancellor’s latest sleight of hand warns rural taxation and valuation expert Charles Cowap of Harper Adams University College. This morning’s announcement of a new entrepreneurs’ relief from Capital Gains Tax looks on the face of it like good news. But it could still leave you worse off says Cowap.
The new relief will provide a new lower rate of CGT to entrepreneurs when they dispose of business assets. It will work like this: the first £1 million of such lifetime gains will be taxed at a new lower rate of 10%, compared with the standard headline rate for CGT from next April of 18%. Any gains over £1 million will be taxed at 18% instead of the current top rate for CGT of 40%.
On the face of it this looks like good news says Cowap, but the devil here is very much in the detail.
For example, two important reliefs are still going to be withdrawn: Indexation allowance and Taper Relief. Cowap has looked at three scenarios all involving business disposals by entrepreneurs who have held assets since before 1982 – in other words business owners who would have qualified for the full rates of indexation allowance and taper relief.
Scenario One is a small trader selling assets for £200,000 which were worth £50,000 in 1982. Pre today’s changes his tax bill would be £10,000 but after April 2008 it will rise to £15,000.
Scenario Two is a bigger business. Assets sold for £2 million now which were worth £500,000 in 1982. The tax rises from £100,000 now to £190,000 under the new regime, with some of the gain also being taxed at the new higher rate of 18%.
Scenario Three lies in between. Assets sold for £1 million now which were worth £250,000 in 1982. Tax rises from £50,000 now to £75,000 next April. The main reason for the increase in all three scenarios is the loss of indexation allowance which removed the effect of inflation on these gains between the years 1982 and 1998. I
t’s also worth noting, says Cowap, that the small trader in Scenario One would have had no CGT to pay before the withdrawal of Retirement Relief in 1998.