Taper Relief - All you ever wanted to know but were afraid to ask...

Capital gains tax (CGT) taper relief has been in force now for nearly five years. During that time the rules, particularly for business assets, have been revised and improved. The sale of a business asset at a gain after just two years of ownership will mean that taper relief at 75% is available. Only 25% of the gain is taxable which gives an effective tax rate of 10% for a higher rate taxpayer. Is it really as simple as all that?

We set out below the answers to some frequently asked questions. If you would like to discuss any of the points raised further then, as ever, we are only a phone call away.

Q: I have heard that shares only qualify for the higher level of business asset taper if the company in question is a trading company. Is this correct?

A: Certainly when taper relief was first introduced, shares qualified for business asset taper only if the company was a trading company. However, the rules have been relaxed since so that shareholdings in non-trading companies now qualify so long as you are employed (on a full or part-time basis) by the company and do not (together with your relatives) own more than 10% of the company.

Q: I have shares in a trading company but the company also has some investments. Does this cause a taper relief problem?

A: This is a difficult one! Basically the Inland Revenue’s view is that a trading company needs to be at least 80% trading. Up to 20% can consist of non-trading or investment activities without creating a taper relief problem. The issue of course is 20% of what? A number of different measures could be appropriate including turnover and the asset base of the company. A common difficulty relates to significant surplus cash which the Inland Revenue may seek to treat as part of the non-trading activities of the company.

Q: I have owned a 3% shareholding in my family trading company for many years. I plan to sell the holding sometime during 2003. Will I get 75% taper relief?

A: The answer here is very simple but probably not the one you were hoping for. No! Although your shares count as a business asset now, 75% taper requires that they have been a business asset ever since 1998 when taper relief was introduced. Between 1998 and 2000 a valid business asset required a holding of at least 25% of the voting rights in a company or, failing that, at least 5% together with full-time employment. Since April 2000 all shareholdings in unquoted trading companies have qualified for business asset taper. The effect of the change in the rules is to restrict your taper relief when you sell your shares. Your rate of taper relief will depend upon the precise date of sale but will be somewhere between 50% and 55% rather than 75%.

Q: I am employed by a quoted company in which I own some shares. I plan to retire soon but retain my shareholding. If I sell my shares at some point in the future what is my taper relief position?

A: Unless you have at least 5% of the voting rights in the company the effect of continuing to hold them after retirement will be gradually to reduce or ‘dilute’ your rate of taper relief over time.

Whilst the taper relief regime is undoubtedly generous, there are a number of possible problems and pitfalls. Solutions may be found but generally these require advance planning. Don’t delay; talk to us soon!

Don’t forget that the taper relief regime only applies to individuals (and trustees and personal representatives). Disposals by companies continue to be subject to a different regime.