Small businesses handed CGT reprieve

Up to 80,000 small business owners have been handed a reprieve from controversial reforms to capital gains tax rules that would otherwise have cost them £200m a year in extra charges.

Alistair Darling, the Chancellor, said he had decided to impose a lower rate of CGT on small business owners and entrepreneurs selling their businesses, rather than charging them the new rate of 18 per cent due to be introduced in April. The concession will mean small business-owners selling their businesses will pay only 10 per cent CGT, as long as their gains do not exceed £1m.

Mr Darling's announcement follows CGT reforms he proposed in October's pre-Budget statement that have been widely attacked.

The Chancellor said he had listened to criticism of the proposals from business groups but still intended to press ahead with the abolition of taper relief and the introduction of a new flat rate of CGT of 18 per cent.

Currently, taper relief enables taxpayers selling business assets they have held for more than two years to pay a reduced 10 per cent rate of tax. In October, Mr Darling said the abolition of the relief and the new CGT rate would raise additional tax revenues of £900m a year, though yesterday's concessions will reduce that by £200m.

John Wright, the national chairman of the Federation of Small Businesses, said: "The Chancellor said specifically that he wanted to help small businesses facing big tax rises from April and that is very good news indeed."

However, Richard Lambert, director-general of the CBI, said the CGT reforms would act as a disincentive to entrepreneurs considering building long-term businesses. "The reality is that these revised measures will do nothing to help the real business powerhouses of this country – although £1m might sound a lot, it could have been built up over 20 or 30 years," he said.

"The bottom line is that the reaction of the UK government, in the face of an economic slowdown, has been to slap on a major tax hike of £700m."

The £1m allowance will be a cumulative lifetime relief, rather than applying to each disposal made by a small business owner. It will also only be available to entrepreneurs selling businesses in which they own at least 5 per cent of the shares. As a result, employees in share ownership schemes will still have to pay the 18 per cent tax rate.

Mr Darling also announ-ced that he planned to hold further discussions with the insurance industry over how the new rules would be applied to insurance bonds. Under the rules, their products will be taxed more aggressively than savings plans such as unit trusts sold by fund managers.