Further Capital Gains Tax changes announced

At the Pre-Budget Report (PBR) last year, Alistair Darling announced that there would be a major reform of the capital gains tax (CGT) regime. On 24 January he made a further statement introducing a new "entrepreneurs' relief" which will form part of the new regime to take effect from 6 April 2008. How will this relief work and who will be the winners and losers?

What was announced at the PBR?

In October last year, the Chancellor announced that he would be making major changes to the CGT regime. The proposals included the introduction of a flat rate of CGT of 18% and the abolition of taper relief and indexation allowance.

Business owners were left facing an 80% increase in their CGT liabilities (from an effective rate of 10% to a flat rate of 18%), however no draft legislation has been available until now to help business owners decide whether to crystallise their gains before the new rules come in.

Draft legislation was originally expected before Christmas and the subsequent long delay in its publication fuelled speculation that the proposals would be delayed in order to give business owners time to get their affairs in order. However, the statement made on 24 January confirmed that the changes would be coming into force from April this year, giving shareholders just 10 weeks to take advantage of the current rules and effective tax rate of 10%.

What is the entrepreneurs' relief?

This relief will be targeted at the owners of small businesses, and will apply when they sell their business. The relief will also be available to employees, company directors and business angels, who invest a material stake (broadly a 5% shareholding) in a qualifying company.

Entrepreneurs' relief will deliver a 10% tax rate for up to the first £1 million of lifetime capital gains. Individuals will be able to claim relief for gains made on multiple occasions, up to a cumulative total of £1 million. Gains in excess of the £1 million limit will attract the new flat rate of 18%.

Who will be the winners and losers of the new regime?

For those investors whose assets did not qualify for the business asset rate of taper relief, they will see a reduction in their effective rate of CGT. However, their position will be more complicated if they held their asset before 6 April 1998 and also benefited from indexation allowance.

Small business owners will remain unscathed from the change to a flat rate this April thanks to the entrepreneurs' relief, but serial entrepreneurs, bigger business investors, investors in fast growing businesses and private equity still face an 80% increase in CGT.

Employees in share schemes will also potentially face an increase in tax. Alistair Darling argues that the majority of employee shareholders would find their gains covered by the annual exemption, which will rise in April. However, this will not always be the case and employees holding less than 5% of the shares could have a gain in excess of the annual exemption.

Francesca Lagerberg, Head of Grant Thornton's National Tax Office says: "The CGT allowance of 10% on the first £1 million of gains will have calmed a lot of nerves for smaller businesses, but there are many that now face the prospect of hurrying through a sale of assets or other planning in a matter of weeks to take advantage of taper relief and the indexation allowance before it disappears for ever."

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