Newsletter Spring 2007
Will capital gains tax be reformed?
The Liberal Democrats recently called for a fundamental reform in the structure of CGT and in particular the rules regarding taper relief.
Taper relief provisions greatly benefit those who are selling a company. In the 2007/8 tax year, individuals making a capital gain from the sale of their company shares enjoy a personal tax free allowance of £9200. Thereafter they pay tax at their highest income tax rate and, for most, this will be 40%. However, if the individual has held the shares for more than 2 years, the income tax rate payable is reduced by 75% and, therefore, they only suffer income tax at a rate of 10% on the gain.
These taper relief provisions also benefit substantially private equity investor companies who can effectively shield their profits by having them treated as Capital Gains and they therefore only suffer 10% tax, rather than the 30% Corporation Tax rate. There is, therefore, increasing political opinion that this tax “loophole” should be stopped.
In fact the Liberal Democrats are talking about reducing CGT allowances to just £1000 per person and abolishing taper relief. These changes will substantially affect the income tax paid by individuals on the sale of the shares in their own companies which may have taken many many years to build up to their current value.
Example:
With regard to a sale of shares where the investor makes a £500,000 taxable gain.
Maximum tax under the taper relief provisions - £50,000
Contrast With Capital
Gains Tax at full 40% - £200,000
Whatever your political views, it must be clear that right now is a good time to consider a sale of your company shares. The tax benefits of taper relief are attractive and also investors are attracted by the tax advantages of putting money into the acquisition of business. This may not last.
Thinking of Selling your Company? Contact ACF for a confidential free valuation and consultation.