Finance Bill 2002: EXPLANATORY NOTE
CLAUSE 45: TAPER RELIEF: HOLDING PERIOD FOR BUSINESS ASSETS
SUMMARY
1. This clause improves the taper relief regime for gains arising on disposals of business assets by providing for maximum benefit to be available after a holding period of just two years, rather than four years. This will apply for disposals on or after 6 April 2002.
DETAILS OF THE CLAUSE
2. Subsection (1) substitutes revised figures for the business asset taper as set out in the table provided by Section 2A(5) of the Taxation of Chargeable Gains Act 1992. The table sets out the percentage of the gain that is chargeable to Capital Gains Tax (CGT) according to the number of whole years in the qualifying holding period.
3. Subsection (2) provides for the revised percentages to apply in relation to disposals made on or after 6 April 2002.
BACKGROUND NOTE
4. CGT taper relief was introduced in the Finance Act 1998.
5. The relief progressively reduces the amount of a gain that is charged to CGT on the disposal of an asset, the longer that asset is held after 5 April 1998. Taper relief applies to the capital gains of individuals, trusts and the personal representatives of deceased persons, but not to the chargeable gains of companies.
6. Different taper rates apply to business assets and non-business assets. Business assets include:
- assets used in an individual's own trade, and
- certain shareholdings in trading companies.
7. As a result of this change, the effective rate of tax for higher rate taxpayers on chargeable gains on assets which have always been business assets is reduced to:
- 20 per cent after a holding period of one year, and
- 10 per cent after only two years.
8. The existing and new effective rates for disposals of business assets by higher rate taxpayers are set out in the following table.
|
Whole years held from 6 April 1998 |
Existing rates |
New rates (disposals from 6 April 2002) |
||
|
Percentage of gain charged to tax |
Effective rate of tax for higher rate taxpayer (%) |
Percentage of gain charged to tax |
Effective rate of tax for higher rate taxpayer (%) |
|
|
<1 |
100 |
40 |
100 |
40 |
|
1 |
87.5 |
35 |
50 |
20 |
|
2 |
75 |
30 |
25 |
10 |
|
3 |
50 |
20 |
25 |
10 |
|
4 or more |
25 |
10 |
25 |
10 |
9. This change will apply to all relevant disposals made on or after 6 April 2002, and not just to disposals of business assets held for more than two years after 6 April 2002.
Example: an asset is acquired on 5 May 2000 and sold on 10 June 2002. It was a business asset throughout the period of ownership. Because it had been held for more than two whole years at the time of disposal, 25 per cent of the gain is chargeable to tax.
10. The change is to the business assets taper only. There is no change to the non-business assets taper. This clause makes no change to the definition of a business asset. If an asset has been both a non-business asset and a business asset, the gain on disposal is apportioned to reflect the time that the asset was a business asset and the time that it was a non-business asset. The apportioned gain on the business asset will benefit from business assets taper relief at the new rates proposed by this clause, as the example below shows.
|
Example Asset acquired 6 April 1999 Non-business asset from 6 April 1999 to 5 April 2000 Total holding period: 3 years, of which:
Total gain on disposal: £9,000. The gain is apportioned to reflect the proportions of time that the asset was a non-business asset and a business asset. 1/3 of the gain is treated as a gain on a non-business asset:
2/3 of the gain is treated as a gain on a business asset:
Each gain receives 3 years worth of taper relief at the appropriate rate:
Total gain charged to tax = £2,850 + £1,500 = £4,350. |
11. The reduction in the length of the taper is intended to provide an increased incentive for successful entrepreneurs to invest in successive businesses. It is also intended to encourage more general investment by individuals in business assets, particularly in new and growing companies for which equity investments are a vital source of capital.