UK: Maximising the Cash on Company Sales

The Benefits of CGT Taper Relief
Last Updated: 27 May 2002
Article by Lisa Parisi

Everyone wants to get the most out of a company sale and the tax regime today means that with a little care and forward thinking shareholders and business owners can do just that.

For many shareholders the days of complex and aggressive capital gains tax (CGT) planning prior to a sale of their shares are over. The very valuable taper relief, which at its best can reduce the effective tax rate on sale to 10 per cent, has been further enhanced so that that rate can now be reached after only two years' ownership.

In fact, taper relief is now so valuable that pre-sale tax planning is less complicated. That's the good news. The key is for shareholders to ensure that they maximise their taper relief position and take care to ensure existing business asset taper relief is not affected by changing activities within the company. Achieving this virtuous position is a little more complicated.

Taper relief was introduced in 1998 and has been changed in each Budget since that date. Shareholders and their advisers therefore have to grapple with rules that are complex and vary depending on the period considered. Here are some of the principal issues.

Will the shares be 'business assets'?

If they are not, they will only benefit from the other form of the relief which gives an effective 24 per cent tax rate after ten years. Except in the case of small minority holdings held by employees, for shares to qualify as business assets it is necessary for the company or group to be 'trading'. Any non-trading activity undertaken or assets held by the company/group could prejudice the relief. For example, in many family companies spare cash may be invested rather than used in the business. This investment activity can mean business asset taper is lost. In some companies there may be more than one activity, only one of which is trading. In those circumstances, shareholders might, for example, consider whether it is possible to split the business so that business asset taper will apply to part.

What if shares are not 'business assets'?

This may apply, for example, to certain shareholders in property or other investment companies. For those shareholders, there are still ways in which the tax charge might be reduced to as low as nil and, in those circumstances, more innovative tax planning is still very much on the agenda. For those who are less brave, tried and tested methods can be implemented to reduce the tax rate on sale to 25 per cent.

What about loan notes? Will these still be used to defer gains?

Historically, selling for loan notes has been used as a way of deferring the tax bill and, under the taper relief rules, improving the taper relief position. Structured correctly, the period of ownership for taper relief purposes continued to run during the period the loan notes were held so shareholders could reach the 10 per cent rate even though they sold out before it was available. Now that the holding period has reduced to two years, this will be less common. In cases where it is still used, changes to be brought in in the Finance Act mean that shareholders have more certainty as to the form the loan notes need to take to achieve the desired result.

What if shares have not always been business assets?

Where shares have been business assets during only part of the period of ownership, it is necessary to apportion the available relief to the business and non-business periods and calculate the 'blended' effect. In many cases, this means that the 10 per cent rate will not be achieved until 2010! Despite lobbying, the Government has decided to retain these provisions, which can result in complex calculations. This is particularly relevant to shareholders who hold less than 25 per cent of the votes (or less than 5 per cent if employees). Up until April 2000 their shares were not business assets for taper relief purposes so on a sale now, for example, their effective rate would be around 21 per cent rather than the 10 per cent they may be expecting.

Can shareholders avoid the blended taper relief?

Shares and loan notes can normally be transferred into trusts in order to restart the taper relief 'clock' and 'lose' non-business periods. Of course, this is only worth doing where a shareholder is confident that there will be no sale for at least one year as initially the potential effective CGT rate goes back up to 40 per cent. In addition, there are certain downsides which the shareholder needs to be aware of, so professional advice is needed. Where this form of planning is appropriate, it is obviously best for it to be implemented sooner rather than later to set the 'clock' ticking.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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