Darling: £1m CGT reprieve

24-01-2008

Darling: £1m CGT reprieve
Chancellor Alistair Darling has given small business owners a reprieve from tax changes that would have seen their capital gains tax (CGT) bill double.

Today in parliament, Mr Darling announced changes to his controversial simplification of the CGT system - which will now see owners of small businesses taxed at ten per cent for the first £1 million earned from selling assets.

The capital gains tax entrepreneurs' relief will come into force in April.

The new system was brought in after Mr Darling faced widespread condemnation of his plans to remove the higher and lower CGT rates and put a single 18 per cent charge in place.

Mr Darling said: "This measure will benefit the owners of small businesses when they choose to sell their business. And it will also benefit business angels and other business investors who take a five per cent or greater stake in the company concerned.

"As a result of the reforms I have announced, entrepreneurs and material business investors will keep 90 per cent of the first £1 million of gains they make.

"And they, and everyone else, remain entitled to make gains of up to £9,200 a year without paying any capital gains tax."

The chancellor estimated 80,000 business owners and investors will use the capital gains tax entrepreneurs' relief, with 90 per cent of cases being taxed at ten per cent – with a cost to the state of £200 million a year.

The original move to a single rate of 18 per cent – unveiled in the pre-Budget report in October - was an attempt to stop private equity bosses from paying low rates of tax when selling firms – but it led to criticism from the business community for creating a disincentive to investment.

Small business owners also objected – with many finding plans for funding retirement through selling their firms put at risk by a doubling of their tax bill.

The new changes to the CGT have been welcomed by the Federation of Small Business (FSB).

John Wright, FSB national chairman, said: "The entrepreneurs' relief the chancellor announced today is close to the proposals we put forward at the end of last year.

"They will go some way to protecting entrepreneurship in the UK as well as benefiting small business owners planning to pay for their retirement with the sale of their businesses."

He added: "We welcome these plans, but the way in which the whole issue has been handled has seriously eroded small businesses' trust in the government. There has been huge uncertainty about what small businesses' tax liabilities would be from April 2008 and this has made planning for the future very difficult.

"Even now small business owners have very little time to prepare before these new changes come in."

Kevin Nicholson, UK head of entrepreneurs and private companies, PricewaterhouseCoopers LLP, has now called on the government to work more closely with business before any further tax changes.

He said: "We will always welcome moves to create simplicity in the tax system. But this needs to go hand-in-hand with providing certainty to taxpayers and being willing to listen to those affected. Frequently tweaking the UK tax system - as has been evident with the CGT system - only adds to complexity.

“If the government is committed to simplifying the UK tax system, it must work with business to implement a long term strategic tax policy framework. Business will then have more confidence to plan ahead and in turn be more welcoming to future, planned changes to the tax system. Without this, the UK will struggle to achieve its potential as a true enterprise economy.”

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