EXPLANATORY NOTE

CLAUSE 66: CAPITAL GAINS TAX: TAPER RELIEF: ASSETS QUALIFYING AS BUSINESS ASSETS

1. This clause provides new definitions to be used to determine whether shareholdings are business assets at any time on or after 6 April 2000 for the purposes of Capital Gains Tax (CGT) taper relief. The clause broadens the definition of the shareholdings which will be treated as business assets so that the following will qualify:

• all shares and securities in unlisted trading companies;

• all shares and securities in a listed trading company where the individual is an employee or an officer (including those involved on a part-time basis); and

• all shares and securities in a listed trading company where the individual is able to exercise at least 5% of the voting rights in the company.

• the company is unlisted; or

• if the individual is an employee or officer of the company, or of a company having a relevant connection with it; or

• the individual can exercise not less than 5% of the voting rights in the company.

1. The treatment of shares or securities held by personal representatives and trustees will be similar — in the latter case with the test of whether an eligible beneficiary is an employee or officer of the company.

2. Subsection (5) amends the definitions in paragraph 22(1) of TCGA by inserting a new definition: an unlisted company is one which has none of its shares or securities listed on a recognised stock exchange and which is not a 51 per cent subsidiary of a company which has any of its shares or securities so listed. The subsection also removes two redundant definitions.

3. Subsection (6) states that the changes take effect for determining the status of assets for times on or after 6 April 2000; the section does not affect the status of assets in respect of a time before 6 April 2000.

 

BACKGROUND NOTE

4. CGT taper relief was introduced in the Finance Act 1998.

5. The relief progressively reduces the amount of a capital gain which is charged to CGT on the disposal of an asset, the longer that asset is held after 5 April 1998. Taper relief applies to the capital gains of individuals, trusts and the personal representatives of deceased persons, but not to the chargeable gains of companies within the charge to Corporation Tax.

6. Different taper rates apply to business assets and non-business assets. In addition to certain shareholdings in trading companies, an asset used for the purposes of a trade is a business asset. The preceding clause [CGT: Taper Relief: Taper for Business Assets] shortens the business assets taper so that it reduces the gain chargeable to CGT over a four year period rather than a ten year period.

7. Under the existing rules, shares in a company qualify as a business asset if the company is a trading company or the holding company of a trading group and:

• the shareholder controls not less than 25% of the voting rights of the company; or

• the shareholder controls not less than 5% of the voting rights and is a full-time working officer or employee of the company.

1. Some definitions are relevant to the new rules and are set out below.

2. Recognised stock exchange is defined in Section 288(1) of TCGA by reference to Section 841 of the Income and Corporation Taxes Act 1988 (ICTA): so recognised stock exchange means the London Stock Exchange and any stock exchange outside the UK recognised by Order of the Board. Shares that are traded on the Alternative Investment Market are treated as unlisted.

3. 51 per cent subsidiary is defined in paragraph 22(1) of Schedule A1 to TCGA by reference to section 838 of ICTA. A company is a 51 per cent subsidiary if more than 50 per cent of its ordinary share capital is owned directly or indirectly by another company.

4. Shares are defined under paragraph 22(1) of Schedule A1 to TCGA as including securities. So, securities in an unlisted trading company will qualify as business assets even if the holder of those securities does not hold any shares in that company; similarly for an employee holding securities in a listed trading company.

5. As under the existing rules, an employee or officer will qualify if s/he is an employee or officer of a company which has a relevant connection with the company in which the person owns shares. A relevant connection is defined in paragraph 22(2) of schedule A1 to TCGA: a company has a relevant connection with another if they are both members of the same group of companies or if they are under common control and carry on complementary businesses which can reasonably be regarded as one composite undertaking.

6. As now, the term "officer" includes all directors of a company.

7. Under the unchanged sub-paragraphs 5(2)(b) and (c) of Schedule A1 to TCGA, the new rules for determining what is a qualifying company for business asset treatment also apply to assets owned by an individual and used for the purposes of trade carried on by a qualifying company.

8. The changes in the rules for shares and other assets to qualify as business assets take effect for periods of ownership from 6 April 2000. So some shares and other assets might be treated as non-business assets in respect of periods of ownership before 6 April 2000 and as business assets thereafter.

9. Under the rules (which are not being changed), the gain on disposal would be apportioned between a gain on a business asset and a gain on a non-business asset, as set out in the example below:

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