The principal news from the Chancellor’s Pre-Budget Report 2007 is the significant changes he has made to the taxation of capital gains. He has stated his intention to abolish taper relief from 6th April 2008 and established a new flat rate for CGT of 18%. These changes will in our view have a significant effect and could have far-reaching consequences.
Currently capital gains on disposals of assets are effectively regarded for tax purposes as additional income so that higher rate tax payers can be liable to pay tax at the rate of 40% on such gains. However since 1998 taper relief has been available to individuals and to trustees which has the effect of reducing the rate of tax according to the length of time the asset has been held before being sold.
A business asset (including shares in an unlisted company) held for two years or more attracts the most generous tax reduction as for higher rate taxpayers the rate of tax drops from 40% to 10%.
Owners who have held business assets for more than two years could accelerate their plans to sell the business before the tax rate goes up next April and there has already been speculation that the tax change will lead to an increase of business sales activity in the next few months.
Whilst if you have held the business assets for over two years, you will face an increase of 80% in the tax you will pay if you leave any sale beyond 6 April 2008, prices for businesses put up for sale too hastily prior to April 2008 may become artificially depressed as it becomes a “buyers’ market”.
If a quick sale is not appropriate for whatever reason owners may decide to defer any decision and hold on to the business assets longer than they would otherwise have done - perhaps in the hope that further changes will be made at a later date which may prove more beneficial.
Certainly individual shareholders and business owners should positively consider whether it would be in their best interests to try and achieve a sale before 6 April 2008 – but that may not be the best solution for everyone.
As always the best approach is to take advice from experienced professional. At DMH Stallard we are not only able to advise you on the legal aspects of any proposed sale but can put you in touch with corporate financial advisers and accountants to help you prepare for a sale.