CGT - entrepreneurs’ relief

This week saw the publication of the draft legislation for the new CGT entrepreneurs' relief to apply to disposals after 5 April. It comes as no surprise that much of the new relief is a re-birth of the old retirement relief. Add a dash of the outgoing taper relief (as with the definition of a trading company) and we have a heady mix of the new, the obsolete and the obsolescent. So much, then, for simplification.

On the plus side, the new relief, in contrast to the old retirement relief, requires an ownership period of only one year (which, when it comes to the building up of a profitable business, is going some for the even the most capable entrepreneur and is, perhaps, unnecessarily generous). Further, whilst there is a requirement that the claimant has been an employee/officer/partner in the subject matter of the disposal, there appears (as yet) to be no suggestion that the claimant will need to work in the management of the business concerned, nor work on a full time basis (thereby avoiding an unearthing of the hilarity that was the Revenue's assertion that a full time working week was a massive 30 hours).

The relief will also extend to furnished holiday lettings businesses. Doubtless this will please some, but certainly not those locals in Cornwall and other similar locations who continue to be priced out of their own housing markets by those chinless wonders from the smoke who have been buying up local properties by the dozen in recent years. In a week when the Chartered Institute of Taxation has called on the government to reveal its blue skies thinking over tax policy, it is this type of ill-thought out policy which leads one to wonder whether it matters what colour the sky is when all the current government can see is the inside of its own derriere.

On the negative side, the availability of the relief only to those who work in the business concerned will deprive small business of much needed angel investment. At a time when there is plenty of evidence that small businesses are being deserted by the banks, the absence of the new relief as a carrot to potential outside investors will not be good news to those businesses already struggling to raise working capital.

Given the government's unerring ability to lay itself open to easy criticism and bad PR, it was almost inevitable that QCB holders were going to have something to complain about. Where the loan note holder would have qualified for the new entrepreneur relief, had the relief been in existence at the time of the disposal giving rise to the loan notes, the holder will now qualify for the entrepreneurs' relief on the first £1M of gain which becomes unfrozen on the disposal of the loan notes after 5 April, thereby maintaining the effective 10% rate of CGT on the first £1M of capital gain. The unfreezing of gains in excess of £1M will be taxed at the new 18%, as will those many latent gains which have been passed over to spouses.

The allocation of a lifetime allowance to a past transaction is highly suspect in principle and there are certainly grounds to complain about the lack of certainty in the law which this sort of workaround reflects. Notwithstanding, there must, however, be some sympathy for the draftsman when it comes to the technicals involved, and a lack of sympathy for those who complain about being stripped of their 10% entitlement when there was never such a thing. Whether the attentions of aggrieved loan note holders will turn to their advisers remains to be seen but our experience suggests that many loan note holders will not have received, or taken heed of, the health warning which should have accompanied the risk of deferring a gain at a time when an upward trend in tax rates was in prospect.

It remains to be seen, but with many loan note holders being in the semi or fully retired bracket, it has to be likely that those sitting on significant frozen capital gains will now have reason to consider sidestepping the whole issue by going on a 5 year foreign holiday whilst realising their gains.

Lastly, the new relief displays no restrictions on husbands and wives both being able to benefit from the relief. At a time when we are still struggling to make any practical sense whatsoever out of the income shifting proposals which are aimed at the classical husband and wife small business, one has to wonder over the quality of a government which has no problem over the shifting of capital gains between the owners of family businesses. The absence of any equivalent provision in the new entrepreneurs' relief reflects an entire absence of joined up thinking when it comes to policy making and will add yet more complication to the taxation of small businesses and their proprietors.