Shareholders in private companies will be particularly affected by the withdrawal of taper relief. Companies will be unaffected by the changes as they are liable to corporation tax in respect of their chargeable gains.
The withdrawal of taper relief is part of wider reform to the CGT regime which was announced on 9 October 2007 in the Pre-Budget Report. The capital gains tax reform is to be introduced by the Finance Bill 2008 and should become effective from 6 April 2008. The withdrawal of taper relief (and its predecessor, indexation allowance) will accompany the movement to a new flat rate tax of 18% on capital gains. It is this withdrawal of taper relief in respect of business assets which will have the greatest impact on shareholders in private companies.
The amendments to the CGT regime were apparently aimed at private equity fund managers who enjoyed an effective tax rate of 10% on certain investments qualifying for business asset taper relief, which had received significant press interest in the months leading up to the Pre-Budget Report. However, the changes not only impact on private equity fund managers but shareholders in private companies. Shares in private companies are regarded as business assets for the purposes of taper relief provided that certain qualifying conditions are satisfied. This would mean that if they have been held for two years or more a 10% rate of tax may apply on their disposal. The removal of taper relief results in an effective tax increase of 80% on the disposal of qualifying shareholdings and is predicted to cause a short-term increase in M & A activity prior to its introduction on 6 April 2008. In addition the new provisions may result in a greater tax burden across the board, as there will be no relief for inflationary gains.
Business groups, including the Confederation of British Industry, view the changes as a significant threat to entrepreneurial activity and are leading a campaign against the changes. However, it is expected that the provisions relating to CGT in the Pre-Budget Report will be enacted without significant modification in the Finance Act 2008.
Ailsa Mapplebeck is an associate specialising in corporate finance with UK law firm Shepherd and Wedderburn