CGT Changes In The Budget
The March 1998 Budget announced CGT changes that will impose significant new liabilities on small business owners who sell up and retire. This is a crucial issue since many business owners regard their businesses as their pension plan and have been encouraged to do so by Government.
The Chancellor has introduced a system of CGT tapered relief which means the longer you keep the business, the less tax you pay (eg, one year equals 40%, ten years equals 10%).
The effect is that business owners retiring with a capital gain of more than £1 million will gain from the changes whilst those gains of less than £½million will lose.
Under the old system, the sale of a business worth up to £250,000 incurred no CGT. Businesses worth up to £1 million paid no tax on the first £250,000 and half tax on the remainder. Businesses worth over £1million paid the full tax rate of 40%.
However, the Chancellor has now abolished retirement relief which means that for example, someone who has owned the business for ten years now faces a 10% tax bill. Yet at the other end of the spectrum, a business owner selling his enterprise for £2 million actually makes a saving of £350,000 in tax. An odd sort of redistribution of wealth.
A possible solution is this for gains between £250,000 and £500,000 business owners would pay a steadily increasing taper up to a maximum of 10%. Discounting the effects of inflation, everyone would end up as well off after the change than before.
Under the transitional scheme, existing reliefs will be phased out over five years. But the new tapered scheme will take ten years to introduce. For a business owner who is planning to retire in 2003 the existing reliefs will have been removed over five years. But because the start date of this scheme was in 1998, he will be deemed to have owned the business for over five years, even if he has owned it for twenty! Hence, he will face a 25% tax bill.
This situation is grossly unfair.
A solution might be to re-base the ten year taper to the date that the owner originally acquired the business, with no transitional scheme.
An exchange of views will be desirable with the intent of making an FMB submission to Geoffrey Robinson, the Paymaster General.
