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Business Assets Taper Relief is a replacement for indexation (inflation) allowance and retirement relief
(now withdrawn). A taper relief may be available which reduces gains on a sliding scale according to the complete number of years that an asset has been held from acquisition or from 6 April 1998 if later. A higher rate of taper relief is available for business assets.
Rate of Taper
For disposals on or after 6 April 2002,
the taper relief rate for business assets is 50% after one complete year
and the maximum 75% after two complete years.
With the present lower and higher tax
rates of 20% and 40% this gives rise to effective tax rates after
minimum taper relief of 10% on business assets for a higher rate tax
payer and 5% for a basic rate tax payer.
This compares with tax rates for non
business assets with maximum taper of 24% and 12% respectively. These
rates for non business assets only apply for disposals after ten
complete years.
The difference in capital gains tax
payable for business and non business assets can therefore be
considerable.
Definition
of Business Assets
A business asset is defined broadly as:
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1. |
An asset used for the purposes of a trade carried on by the individual (either alone or in partnership) or by a qualifying company of that individual. |
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2. |
Assets held for use in his employment by an employee working for a trading employer. |
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3. |
Shares in a qualifying company,
i.e. |
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(a) |
a trading company or holding company of a trading group which is either an unquoted company, or a quoted company in which the tax payer is an officer or employee, or in which he holds 5% or more of the voting rights. |
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(b) |
a non-trading company or holding company of a non-trading group in which the tax payer is an officer or employee, where the tax payer does not have a material interest (broadly not more than 10% of share capital) in the company or a company controlling it. |
With regard to heading 1.
it should be noted that if an asset other than shares is used by any unquoted trading company, the company is the tax payer's qualifying company and the asset qualifies as a business asset.
Business Assets Taper relief is therefore available to a landlord with an unquoted trading company tenant. From 6 April 2004
this relief has been extended to let property used by
unincorporated traders.
Where an asset is disposed of which has
changed its status from "non-business asset" to "business asset" (or
visa versa) at some point during up to a ten year period of ownership
the rates of taper relief applicable must be apportioned. For example a
disposal on 6 April 2007 of a property let to an unincorporated trader
since commencement of ownership on 6 April 2000 will attract 3/7ths
business assets taper relief and 4/7ths non business assets taper relief
("tainted taper").
The detailed provisions
relating to the definition of 'business assets' are complex and in some instances
unclear. Great care needs to be taken to ensure that the necessary conditions are satisfied.
In their June 2001 and December 2002 Tax
Bulletins the
Inland Revenue published guidance on the meaning of
various terms used in the legislation, but it remains
unsatisfactory that these meanings have not been made
clear in the legislation itself.
A prime example is that a trading company
will not be
regarded as such for business assets taper relief if, for
example, it has too much in the way of non trading income, investments
or cash. Quite where the line is drawn is often not clear.
Taper v
Retirement Relief
Individuals who may previously have qualified for some retirement relief in respect of a share holding may wish to review their position, as taper relief is an
'all or nothing' relief. This contrasts with retirement relief
(which has now been completely phased out), some measure of which may have been available for share holdings in a trading company which had held investments.
Summary
Business assets taper relief with an effective 10% tax rate is a valuable tax relief. However, in view of the complexities of the relief, it is recommended that professional advice is sought at the earliest opportunity to ensure that appropriate steps are taken to maximise any available tax relief.
Please note:
This guide is intended to
provide basic information only. Where specific advice is required, we
recommend that you seek proper professional help; either from this firm
or other suitably qualified person or practice.
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