For disposals after 5th April 2008 a flat rate of 18% comes into effect. Unfortunately this did mean a big tax increase for small business owners looking forward to selling their businesses, perhaps to fund their retirement, or maybe planning to invest in a different business.
Entrepreneur relief has been introduced to help resolve this problem. This taxes the first £1 million gain at 10%.
Relief is available on
- the disposal of the whole or part of a business
- the disposal of assets used for the purposes of a business at the time when the business ceases to be carried on
- disposals of shares or securities in a company
An individual may make claims for relief on more than one occasion, with a lifetime limit of £1million in gains qualifying for relief. The annual exemption which for 2008/09 is £9,600 will remain, however indexation relief and taper relief disappear from April 2008.
The business must be a trade, profession or vocation and the company must be a trading company or the holding company of a trading group. The individual must have been involved (ie been the owner or a partner) in the business for a year prior to disposal. For shares in companies, the individual must have been an officer or employee of the company and owned 5% of the company’s ordinary share capital with 5% of the voting rights. There is no need to have been a full time officer.
For a disposal of assets these must have been in use for the purposes of the business at cessation of trading, relief remains available providing the assets are disposed of within three years of the date of cessation.
Commercial property qualified for taper relief and hence the 10% tax rate. It is important for landlords to realise that their investments will not be classed as a ‘business’ and they will not receive the new entrepreneur relief on the sale of the property. This is a disadvantage over the old taper relief rules.
Property used for ‘furnished holiday lettings’ will be treated as a business and will qualify for the 10% rate. Property used in a business, or let to the owners trading company and sold at the same time as the business, will qualify. All other property will be taxed at the ‘universal’ 18% rate.
Davies McLennon are Stockport Accountants