Large CGT rise fails to materialise

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27 July 2010

The Coalition’s emergency Budget was delivered on 22 June.  The focus was primarily on significant cuts to public spending rather than tax increases, although inevitably tax rates did not escape unscathed. There were no announcements about inheritance tax or the status of non-domiciliaries but of course the Chancellor needs to keep something up his sleeve for next time!

The Government opted for the new 28% rate of CGT to be a flat rate with no form of indexation or taper relief which many thought might make a reappearance.  There is little to incentivise long term investors and it would not be surprising if this is revisited in time.

The good news came in the form of an extension of Entrepreneurs’ Relief to the first £5 million of lifetime gains (up from £2 million).  Entrepreneurs’ Relief is a lifetime relief that can be claimed by individuals on the disposal of a business or certain shares or securities of a trading company.  This will be a welcome boost to entrepreneurial activity as the first £5 million of gains will be taxed at a rate of 10% and therefore more focus will be needed on trading structures and arrangements to ensure that the maximum amount of relief is secured.  The relief could be worth up to £900,000 per family member and so is now as important as Business Asset Taper Relief used to be.

Essentially Entrepreneurs’ Relief is available on an interest of 5% plus in a trading company in which an individual is employed and it is also available on an interest in a sole trade or a partnership.  There are, however, times when it may be difficult to secure the relief on the sale of an asset held outside but used in a partnership where, had the asset been owned by the partnership, relief would have been available.  Therefore there is a compelling case for restructuring partnerships to introduce land into them as real property capital in order to maximise both Entrepreneurs’ Relief and Business Property Relief for inheritance tax purposes which can be achieved without a charge to either CGT or Stamp Duty Land Tax.

The other attractive headline of the Budget was the announcement that the full rate of corporation tax will be reduced from 1 April 2011 by 1% a year for five years until it is 24%.  In addition, the small companies’ rate of 21% will be cut to 20% from 1 April 2011 which may lead many to consider incorporation when compared with the top rate of income tax of 50%, although this is only an avenue to pursue if it is appropriate for profits to be rolled up.

For further information, please contact Tom Hewitt or Clare Henderson on 0117 939 2000 or email  tom.hewitt@burges-salmon.com

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