Darling reveals capital gains relief

Alistair Darling yesterday bowed to the demands of the business community by rewriting his own rules on how much tax entrepreneurs must pay when they sell their companies.

The chancellor has agreed that entrepreneurs will face a capital gains tax rate of 10% on any gain in their lifetime of up to £1m, a concession he called "entrepreneurs relief."

It comes after outrage met his initial proposal in the Pre-Budget Report (PBR) in October to replace taper relief of 10% with a single CGT rate of 18%; in effect an 80% tax rise.

But the CBI notes that the new 10% rate, starting in April, is tax relief only "on the surface", as once entrepreneurs gain their first £1m, they will be taxed at 18% for the rest of their life.

One advisor to IT companies said the relief was a realisation from Mr Darling that his initial proposals were "likely to be more damaging" than the government first appreciated.

"[They are also] an attempt to backtrack, without actually making too much difference," added Roger Sinclair, a legal consultant at Egos Ltd.

Yet the tax relief will cost an estimated £200m a year, reducing the £900m a year the Treasury intended to generate from the initial CGT reforms last year.

It will apply to anyone who owns a minimum 5% stake in a trading business and if an employee, company director or other officer of the company.

However relief due on an associated disposal, such as sale of a company premises, will be restricted where the asset was not wholly in business use throughout the period it was owned.

The Treasury said that 80,000 business owners and investors will make use of the CGT relief in the next tax year, during which time it and its criteria will be "under review."

More immediately, business advisors will analyse the wording of the relief in draft legislation, supporting guidance and examples unveiled by HM Revenue & Customs yesterday.

Mr Sinclair said that while the relief would make a positive difference, "I'm not going to get excited about it until I've seen the draft legislation - as always, the devil will be in the detail."

He added: "In particular, it is unclear from what I have seen so far whether or not the 'lifetime basis' for gains qualifying for this relief is intended to be retrospective; on the face of it, it seems it should not, because until now this relief itself has not been available.

"If it is not retrospective, in other words if the lifetime limit does not include gains made before April, then it remains in the interests of those contemplating closing companies to extract retained profits under the current regime to do so before April."

The little time left for entrepreneurs to make potentially life-changing decisions and arrange their affairs before the new CGT regime takes effect was lambasted by the CBI.

The group said: "This tax hike has been badly handled from start to finish. It was rushed out without consultation and there has been precious little since, despite the interminable wait for these revised plans. To be given ten weeks to make major business decisions is simply not reasonable."

In a statement, the Federation of Small businesses was more upbeat about Mr Darling's change of heart, yet it also believes the proposals are being rushed through.

Chairman John Wright said: "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."

The Conservatives rejected the government's claims that the relief was in line with the initial aim of simplifying the tax system.

George Osborne, shadow chancellor, said four months of Mr Darling "dithering and delaying" has left "thousands of business facing uncertainty and instability".

"Darling said it was a £200 million tax cut," he added. "It is in fact if you take the whole package now a £700 million tax rise on enterprise at the very moment when we face the greatest economic difficulties."

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