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• Summary of Some Relevant Tax Changes for the new Tax Year 2008/2009

Capital Gains Tax ("CGT")

In the Pre-Budget Report 2007 the Chancellor announced that taper relief and indexation allowance would be abolished in the forthcoming budget, meaning that all disposals made by individuals, trustees and personal representatives on, or after, 6^th April 2008 would be subject to a single rate of CGT of 18%. The only exceptions would be where they qualified for a relief or exemption from CGT.

Intense lobbying from small and medium sized businesses followed resulting in a new relief from CGT for disposals after 6^th April 2008The government called the new relief Entrepreneurs' Relief.

Entrepreneurs Relief

This is available from 6^th April 2008 to the owners of small businesses on the sale of their businesses, and, on the sale of shares by employees and company directors who own at least 5% of the voting rights in a trading company. Those qualifying for the relief will be taxed at a rate of 10% up to the first £1 million of lifetime capital gains (after deducting the individuals annual exempt amount), the same taxation rate a higher rate tax payer would have paid under Business Asset Taper Relief ("BATR") where they had owned the shares for two years or more.

Individuals are able to claim relief for gains made on multiple occasions up to a cumulative total of £1 million but must have held the shares for a minimum period of a year. Gains in excess of the £1 million lifetime limit will attract the standard 18 per cent rate of tax. Each qualifying gain made by an individual will therefore accrue over his or her lifetime and will be taxed at 10 per cent until the £1 million threshold has been reached. Thereafter gains will be taxed at 18 per cent.

Individuals who have received consideration in shares on loan notes under the exchange-securities rule, or who have received shares or loan notes under an earn-out and are expecting to benefit from BATR are now not entitled to but may use Entrepreneurs Relief where it applies.

Impact of the Changes

The new 18 per cent tax rate will not have an effect on a large proportion of people due to the Entrepreneurs Relief.

Even for gains which would otherwise fall outside the £1m threshold, clever tax planning might also protect the gainfor example issuing loan notes to be redeemed on an annual basis to make the most of the annual exemption, which for the tax year 2008/2009 is £9,600.

As for the transfer of shares between spouses and partners, it is not yet known how HMRC will deal with this as an anti-avoidance measure, but what is clear is that in order to qualify for relief you must be an officer or employee of the Company and hold more than 5% of the shares.

Enterprise Management Incentives(EMIs)

The three year EMI option grant limit will be increased to £120,000 from £100,000 in respect of options granted on or after 6 April 2008.

HM Revenue & Customs (HMRC)New Clearance Regime

HMRC have announced that from this month they will provide businesses with their view of the tax consequences of significant commercial issues wherever there is uncertainty. Previously they would only give such clearance advice where specificed in legislation. This applies to all businesses whatever their size.

HMRC will require details of the proposed clearance and where the clearance relates to direct tax legislation older than the last four Finance Acts the Company will need to demonstrate the commerical significance of the transaction.

HMRC have stated that they will respond to such a request within 28 days. Whether this time limit will be extended if there is a keen uptake in the new regime will need to be watched.

Annual Investment Allowance ("AIA")

As a result of the Budget AIA has been introduced. This is available to all businesses with plant and machinery expenditure, excluding cars. The allowances allows 100 per cent relief on the expenditure of plant and machinery up to £50,000.

In a climate in which capital allowances are generally being restricted, this should provide smaller companies with some help, given that the First Year Allowance is abolished for small and medium sized enterprises. In the majority of cases this should not have an effect as the new £50,000 AIA will be a more than sufficient figure for investing in plant and machinery.

Ashfords is regulated by the Solicitors Regulation Authority. The information in this article is intended to be general information about English law only and not comprehensive. It is not to be relied on as legal advice nor as an alternative to taking professional advice relating to specific circumstances.