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BKL news - Corporate finance 
Is the Chancellor really a Darling?
by Daniel Shear
In the Pre-Budget Report of 9 October 2007 Alistair Darling succeeded in removing what has been, in my opinion, one of the biggest single factors encouraging entrepreneurial activity in the UK over recent years by abolishing taper relief. The previous tax regime had helped incentivise entrepreneurs to successfully grow businesses but now owners of trading businesses are clobbered with a hefty tax charge on disposing of their business.
One of the aims of the Pre-Budget Report was the simplification of Capital Gains Tax and whilst I’m all for simplification of the UK’s overly complicated tax regime, this should not be at a cost which will undoubtedly stifle growth of the UK economy. Moreover, after fierce public opposition to the Chancellor’s plans he introduced Entrepreneurs’ Relief in his budget of 12 March 2008, and the legislation covering this relief has removed any simplicity from the Capital Gains Tax regime.
The bad news first
The Chancellor has removed, amongst other aspects, taper relief and indexation allowance from 6 April 2008. Under the previous Capital Gains Tax rules if someone had owned a trading asset (such as a trading company) for at least two years they would generally benefit by only paying an effective tax rate of 10% on the gain when disposing of the asset. Furthermore, if that person had held the asset prior to March 1998 then they would also benefit from indexation allowance which reduces the capital gain. Under the new rules all capital gains are taxed at 18% with no indexation allowance. The Entrepreneurs’ Relief provides a lower effective tax rate of 10% on the first £1 million of gains on the disposal of trading assets, though this is a lifetime limit so in effect only saves a maximum of £80,000 of tax.
To illustrate the effect of the revised tax rules, suppose someone acquired a trading asset in March 1982 for £1 million and disposed of it in March 2008 for £5 million. Indexation allowance would have increased the base cost to roughly £2 million and so the taxable capital gain would have been £3 million, resulting in a tax charge of £300,000 (ignoring the annual exemption). However under the new rules the tax charge (again ignoring the annual exemption and assuming the lifetime limit of Entrepreneurs’ Relief had already been used) would be 18% of £4 million, or £720,000, this charge being nearly two and a half times as much as under the old rules.
Is it all bad news?
If you own a non business asset, such as a second home, under the old rules non-business asset taper relief would have reduced the capital gain so that you would generally only have paid an effective tax rate of 24% on the gain when disposing of the asset if you had held the asset for ten years (and a higher rate of tax if you had held it for a shorter period). Under the new rules the tax charge on the gain arising on a disposal will also be at 18%, which does offer a considerable saving.
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