Taxation Practitioner by Mark McLaughlin ATII TEPTaper relief is a relatively new capital gains tax relief, replacing indexation allowance for individuals, trustees and personal representatives from April 1998. How is the relief measured and applied, and how does it interact with other CGT reliefs?A tax practitioner's life is generally a busy one. We work in a climate of constant tax changes - and then we have to contend with clients as well! Nowadays, I tend to improvise on my keep fit regime with some weight training using tax legislation. Yesterday, my left arm gave way under the tremendous strain, and I dropped my tax handbook of choice. It was picked up at the new legislation regarding CGT taper relief. The following is a "first principles" introduction to the main provisions (all references are to the Taxation of Chargeable Gains Act 1992).
Taper relief replaces indexation allowance (but not for companies - see below). Indexation is available to April 1998, but no relief is given for subsequent periods up to the date on which a gain is realised.
Finance Act 1998 inserted the taper relief legislation in a new section 2A and Schedule A1, with effect from the 1998-99 tax year. In addition, FA 1998 Sch 21 provides for various amendments to other areas of the CGT legislation in connection with taper relief.
Who is eligible?
- Trustees of a settlement; and
- Personal representatives
Companies are not eligible for taper relief, and therefore continue receiving indexation allowance in respect of gains realised after 5 April 1998.
The rates of CGT taper relief (which are set out in tabular form in s 2A(5)) vary according to whether the asset in question is a "business asset" or "non-business asset";
Business assets attract taper relief of 7.5% for each whole year in a "qualifying holding period", up to a maximum of ten years. Hence a chargeable gain may be reduced by up to 75%, leaving only 25% in charge to CGT. This equates to an effective tax rate of 10% for a higher rate individual taxpayer, 5.75% for a basic rate taxpayer, or 8.5% for trustees.
Non-business assets are treated rather less favourably, receiving no taper relief until year three of the ten year qualifying holding period. The rate of relief thereafter is 5% per annum, and hence a chargeable gain may be reduced by a maximum of 40%, leaving 60% in charge to CGT. This equates to effective tax rates for individual higher and basic rate taxpayers of 24% and 13.8% respectively. The effective rate for trustees is 20.4%.
What are "business assets" and "non-business assets"?
'Business assets' are
a) Shares - if a company is a "qualifying company". In order to satisfy this requirement, the company must be a trading company, or the holding company of a trading group. In addition, at least 25 per cent of the voting rights must be exercisable by the taxpayer. Alternatively, an individual or settlement trustee (but not a personal representative) may hold 5 per cent or more of the voting rights, if the individual or an "eligible beneficiary" (as defined) is a full-time working officer or employee of that company, or a "relevant connected" company. Group members and companies with a commercial association are connected for these purposes.
b) Assets (other than shares owned by an individual, settlement trustee or personal representative) that are used for the purposes of a trade. The trade can be carried on by the asset's owner as a sole proprietor or partner, or by a qualifying company for taper relief purposes (as defined above). An individual or eligible beneficiary may also qualify for relief in respect of an asset used for the purposes of his or her office or employment.
'Non-business assets' are simply defined as chargeable assets that are not business assets (Sch A1 s (3)(4)).
How is the relief measured?
The respective taper relief rates are determined by the number of complete years for which an asset is held after 5 April 1998. This is specified in section 2A(8), which defines the 'qualifying holding period' of an asset as '...the period after 5th April 1998 for which that asset is held at the time of its disposal'.
Note that unless the asset was owned before 6 April 1998, the relief is not measured in terms of fiscal years.
The qualifying holding period is generally increased by one year for assets acquired before 17th March 1998. Business assets held before then and disposed of within a period of one year after 5 April 1998 should therefore immediately qualify for one year of taper relief; non-business assets first become eligible for relief on 6 April 2000. The earliest date on which the 10 year qualifying holding period requirement is satisfied for maximum business asset taper relief is 5 April 2007.
Example:Edwards acquires a business asset in November 1998 and sells it in December 1999. The disposal qualifies for one year of taper relief, reducing any chargeable gain by 7.5% to 92.5%. Had the asset instead been acquired in February 1998, Edwards would qualify for two years' taper relief on the subsequent disposal (one complete year from April 1998 to April 1999, plus one 'bonus' year for ownership prior to 17 March 1998).
Applying the relief
The procedure for applying taper relief is set out in ss 2A(1) and (2). Some noteworthy points in general about the new relief include:
- the relief is after deduction of all other CGT reliefs (for example, retirement relief);
- it is applied to the extent that net chargeable gains exceed current year allowable losses and brought forward allowable losses (or losses carried back from the year of death), but before any available annual exemption; however
- the deduction of brought forward (or carried back) allowable losses may be restricted, to the extent that this preserves the annual exemption; and
- the legislation actually specifies that losses should be allocated against gains in the order which produces the largest reduction in the amount chargeable to CGT; in other words, losses should be allocated against gains with the lowest (or no) taper relief entitlement.
Example:Murdoch bought qualifying business assets A and B after 5 April 1998. Both assets were subsequently sold together in a later tax year. The gains on disposal of assets A and B are £100,000 and £75,000 respectively. At the time of disposal, asset A had been owned for 4 years and qualified for 30 per cent taper relief. Asset B had been owned for 2 years and qualified for 15 per cent relief. Murdoch has available losses of £25,000. His chargeable gains (before annual exemption) are:
Gains subject to taper relief
Net gains (after taper relief):
Asset A - 70% chargeable
Asset B - 85% chargeable
- Where an asset has previously been used partly as a business asset and partly as a non-business asset, the chargeable gain is time-apportioned between business and non-business use. The apportioned gain relating to business use is subject to relief at the rate applicable to business assets; the balance is subject to taper relief at the rate applicable to non-business assets. Where the asset has been held longer than 10 years, any time-apportionment is based on the final 10 years of ownership.
An apportionment between business and non-business use is also required where an asset is partly used for qualifying and non-qualifying purposes at the same time.
-An asset 'derived from' another asset is deemed to be acquired at the same time as the original asset, where both assets are held by the same owner.
Interaction of taper relief with other reliefs
Taper relief interacts with various other CGT reliefs and exemptions. For example:
- assets transferred between spouses - the qualifying holding periods of both spouses are taken into account for taper relief purposes;
- gains on disposal of assets which have been deferred until a later disposal (eg reinvestments in depreciating assets and Venture Capital Trusts) - taper relief is calculated by reference to the holding period of the asset on which the deferred gain arose;
- gains on disposal of business assets which have been 'rolled over' - taper relief applies by reference to the holding period and reduced base cost of the new asset; and
- where 'hold over' relief has been claimed on the gift of a qualifying asset, taper relief applies by reference to the holding period of the asset's new owner.
Shares and securities
Taper relief involves matching a disposal with one or more acquisitions of the same class. Shares and other securities acquired prior to 5 April 1998 were 'pooled' for CGT purposes, and treated as a single asset with a single average cost per share. Pooling is preserved for companies beyond 5 April 1998. However, non-corporate shareholders are faced with the following new identification rules, for disposals after 5 April 1998:
1) same day acquisitions;
2) acquisitions within the following 30 days (the anti-'bed and breakfast' provision);
3) previous acquisitions after 5 April 1998 (on a 'last in, first out' (LIFO) basis);
4) shares comprised in the pool at 5 April 1998;
5) shares held in the 1982 pool;
6) shares acquired before 6 April 1965; and
7) any other shares acquired subsequent to the disposal.
The disposal proceeds are apportioned between each acquisition, before the gain (and any available taper relief) is calculated accordingly.
Other taper relief provisions
There are various other taper relief provisions, including anti-avoidance legislation aimed at restricting the availability of taper relief in certain situations:
- periods during which a person had 'limited exposure to fluctuations in the value' of an asset do not count for taper relief purposes;
- periods prior to a 'relevant change of activity' of a close company do not count for taper relief purposes in relation to the disposal of shares in that company; similarly
- periods prior to a 'relevant shift of value' involving close company shares do not count for taper relief purposes on a subsequent disposal of those shares; and
- assets of settlement trustees cannot be treated as a business assets on disposal where the settlor is a close company.