4th December 2007

The pre-Budget report and business owners

• an 18% flat tax rate for all but companies from 6 April 2008;
• the abolition of taper and business assets taper relief and also indexation relief available for holding periods up to 1998.

Right now, though, I would like to spend a little time on what the capital gains tax (CGT) changes might mean for your business clients. First, if any of them are considering or negotiating a sale of their businesses, entering into a binding unconditional contract before 6 April 2008 will probably secure them an effective 10% rate with the benefit of full business assets taper relief that will be available for qualifying business interests aftertwo years' ownership.Taper reliefreduces the gain by 75%. A 40% rate applied to 25% of the gain delivers an effective 10% rate on the overall gain.

The new 18% rate will effectively increase the CGT rate on business sale proceeds by 80%. A call to action if ever we saw one! If a purchaser isn't already on the horizon or the business either isn't for sale or isn't in shape for sale then it will be hard for the business owner to do anything about this opportunity.

What the change does mean is that for those relying on the proceeds of a post-5 April 2008 sale of their business to provide for their retirement, the price is now going to have to be substantially higher to yield the same net benefit.

For example, with business assets taper relief, £1m would yield £900,000 net. With the 18% rate (after 5 April 2008) £1m would yield a net £820,000.

It also means that greater cover will be needed to deliver the same net benefit to an individual who plans to sell his or her shares following critical illness. CGT revaluation only occurs on death.

It has recently been reported that, in response to strong representations by the CBI and the Federation of Small Businesses, the Treasury is considering the introduction of some form of "retirement relief", providing that the first £100,000 of gains on the sale of your business (combined with exit from the business) will be free of capital gains tax - subject to the satisfaction of certain appropriate conditions. Such relief would be better than nothing but in the simple example shown above our business owner would net £838,000. This is still £62,000 short of the proceeds that would be delivered iftaper reliefwere applied. Whether this, or any further change to the original proposal for a flat 18% rate and the abolition oftaper reliefand indexation relief for individuals, actually occurs remains to be seen.

So in the meantime, based on the CGT proposals as they stand, what are the key messages for your business clients? Well, you should be aware of this change and communicate it to them - especially those who you know are contemplating sale. Of course, you must stress that the proposal is not law yet but that there is a very strong chance that it will be enacted - possibly with some further changes.

The higher CGT rate should also be taken into account in arriving at the sum assured needed for share purchase following critical illness. This could be represented in the sum assured under the purchase policy with the higher price reflected in the agreement. Alternatively (and this would mean a lower CGT bill), the price could be lower and the "seller" could effect a critical illness policy that pays out to him or her to enable meeting the CGT liability so as to leave the required net sum.

Owners relying on their businesses as the sole or main source of income in retirement (following business sale) need to be made aware of the increased CGT rate they are likely to have to bear on business sale - as well as the danger of this "all eggs in one basket" approach to planning. The proposed change represents a further, very valid, reason to challenge the "my business is my pension" approach to retirement planning.

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