Chancellor urged to overhaul gains tax

Businesses for sale: entrepreneurs hope for Budget relief

THE CHANCELLOR is being urged to make fundamental changes to the capital gains tax regime in next month's Budget to improve the environment for selling businesses. The Federation of Small Businesses is leading the lobbying, with calls for an abatement of CGT liability related to the length of ownership of a company. Owners who make short-term gains should be taxed more heavily than those who have displayed a long-term commitment to the enterprise, argues the FSB.

The current CGT rate of 40 per cent was set when the top rate of personal tax was 60 per cent, and there is a consensus among business representative bodies and accountants that entrepreneurialism should be better rewarded. Speculation suggests the CGT rate could be cut to 20 per cent.

A review of CGT was announced by Gordon Brown last year. "The rumours were that it would be root and branch change," says Patrick Stevens, a partner in Ernst & Young's entrepreneurial services division. "Then there was a 'leak' to suggest it would be adjustments only. So no one knows how big the changes will be. There are still suggestions of giving relief to entrepreneurs getting rid of companies."

Mr Stevens urges the Chancellor to take radical action. "We are one of the worst countries in the world for taxing people as entrepreneurs. The idea of CGT being the same rate as income tax is draconian."

Many tax experts expect the Chancellor to introduce a quid pro quo for cutting the CGT rate, by reducing the reliefs available. At present, retirement relief allows those over 50 to take the first pounds 250,000 of the sale price tax free, and be taxed at 25 per cent on the next pounds 750,000. Reinvestment relief is available on income that is put into another business.

But John Whiting, a tax partner at Price Waterhouse, says he would prefer the Chancellor to do nothing than to cut reliefs. "Leave things as they are," he urges. While he favours a reduction in CGT, he says it is irrelevant for the many owners of small businesses who retire and currently receive the income from the sale tax-free.

The Confederation of British Industry, though, is calling on the Chancellor to cut the CGT rate to 20 per cent and to replace retirement relief. With younger business owners playing an increasing role in the economy the CBI says it makes no sense to continue with a relief restricted to business sellers aged over 50. "We are calling for a new Entrepreneurship Relief with the arbitrary age limit replaced by more flexible criteria based on the number of years working full-time in a business and with higher monetary limits on the relief," explains a spokesman.

Mr Stevens also says that too little is done to help the real entrepreneurs. He cites the Enterprise Investment Scheme, which gives a minority passive investor generous tax relief compared with a majority active investor who has to pay full-rate tax. But he differs from the CBI in saying that the situation will worsen if the Chancellor graduates tax according to length of investment. He says the best thing for the wider economy is often for small firms to be sold early in their lives to larger groups to assist their expansion and that it would be perverse if this were taxed more heavily.

Vijay Thakrar, a tax partner at KPMG, welcomes the prospect of a cut in CGT and the introduction of entrepreneurial relief, but adds: "If we are to have a two-tier rate of tax then be sensible about the length of period before getting a lower rate; it should not be something like 20 or 30 years. And it should encourage people to go into business again. There is a lot of talk about reinvestment relief being restricted, and we hope that won't happen."

Richard Baldwin, a tax partner at Deloitte and Touche, agrees that more should be done to encourage disposing owners to start new businesses: "The incentive at the moment is to go non-resident, which does not do the UK economy much good. Most of them get bored with pounds 5m in their pockets, and they could be here setting up new businesses."

Mr Baldwin says, though, that we should not overlook the virtues of the CGT system. "Currently, the environment for capital taxes has never been better for private companies. It is a good opportunity to sell your business, or pass it on to a member of the family, without much of a tax cost."

The big question, of course, is whether possible changes to CGT should encourage owners to sell quickly or wait. Mr Stevens says: "There is no known answer, but I would have thought that on tax reliefs there is a good chance of being worse off after the Budget if you are of an age to take advantage of retirement relief, or if you are going to use reinvestment relief. But if you are not going to take one of those two reliefs, I would say you are probably better off waiting."

Start your day with The Independent, sign up for daily news emails
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

Where the spooks get their coffee fix: The busiest Starbucks in the US is also the most secretive

The secret CIA Starbucks

The coffee shop is deep inside the agency's forested Virginia compound
Revealed: How the Establishment closed ranks over fallout from Loch Ness Monster 'sighting'

How the Establishment closed ranks over fallout from Nessie 'sighting'

The Natural History Museum's chief scientist was dismissed for declaring he had found the monster
One million Britons using food banks, according to Trussell Trust

One million Britons using food banks

Huge surge in number of families dependent on emergency food aid
Excavation at Italian cafe to fix rising damp unearths 2,500 years of history in 3,000 amazing objects

2,500 years of history in 3,000 amazing objects

Excavation at Italian cafe to fix rising damp unearths trove
The Hubble Space Telescope's amazing journey, 25 years on

The Hubble Space Telescope's amazing journey 25 years on

The space telescope was seen as a costly flop on its first release
Did Conservative peer Lord Ashcroft quit the House of Lords to become a non-dom?

Did Lord Ashcroft quit the House of Lords to become a non-dom?

A document seen by The Independent shows that a week after he resigned from the Lords he sold 350,000 shares in an American company - netting him $11.2m
Apple's ethnic emojis are being used to make racist comments on social media

Ethnic emojis used in racist comments

They were intended to promote harmony, but have achieved the opposite
Sir Kenneth Branagh interview: 'My bones are in the theatre'

Sir Kenneth Branagh: 'My bones are in the theatre'

The actor-turned-director’s new company will stage five plays from October – including works by Shakespeare and John Osborne
The sloth is now the face (and furry body) of three big advertising campaigns

The sloth is the face of three ad campaigns

Priya Elan discovers why slow and sleepy wins the race for brands in need of a new image
How to run a restaurant: As two newbies discovered, there's more to it than good food

How to run a restaurant

As two newbies discovered, there's more to it than good food
Record Store Day: Remembering an era when buying and selling discs were labours of love

Record Store Day: The vinyl countdown

For Lois Pryce, working in a record shop was a dream job - until the bean counters ruined it
Usher, Mary J Blige and Will.i.am to give free concert as part of the Global Poverty Project

Mary J Blige and Will.i.am to give free concert

The concert in Washington is part of the Global Citizen project, which aims to encourage young people to donate to charity
10 best tote bags

Accessorise with a stylish shopper this spring: 10 best tote bags

We find carriers with room for all your essentials (and a bit more)
Paul Scholes column: I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England

Paul Scholes column

I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England
Jessica Ennis-Hill: 'I just want to give it my best shot'

Jessica Ennis-Hill: 'I just want to give it my best shot'

The heptathlete has gone from the toast of the nation to being a sleep-deprived mum - but she’s ready to compete again. She just doesn't know how well she'll do...