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CLAUSE 76 AND SCHEDULE
25
CAPITAL GAINS TAX: TAPER
RELIEF: BUSINESS ASSETS
SUMMARY
1.
This clause and Schedule extend the scope of business assets taper
relief to include shares held by employees of non‑trading companies
in the company for which they work. Such employees, when they dispose
of their shareholdings in their employing company, will qualify for
the business assets rate of taper relief provided that they do not
have a material interest of more than 10% in the company. The change
takes effect from 6 April 2000. Employees of trading companies
are already eligible for business assets taper relief.
2.
The main purpose of the change is to extend incentives for employee
share ownership. The clause will in addition reduce compliance costs
for many employees and companies, especially listed companies, as
they will not need to consider whether the company is trading. The
clause includes measures to protect tax revenues.
3.
The clause also extends the business assets rate of taper relief to
disposals by the trustees of a settlement of assets that are used
for the purposes of a trade carried on by them in a partnership with
others.
DETAILS OF THE
CLAUSE
4.
Subsection (1) applies the changes in schedule 25 to the
provisions of Schedule A1 to the Taxation of Chargeable Gains
Act 1992 (TCGA) that deal with taper relief.
5.
Subsection (2) provides that the changes will apply to disposals
on or after 6 April 2000. The changes will apply to periods in
which assets have been held from 6 April 2000.
Schedule
25
6.
Paragraph 1 ensures that the provisions of the schedule amend
Schedule A1 to TCGA.
7.
Paragraph 2 provides that where an asset is disposed of by
the trustees of a settlement, it will be a business asset if it is
used for the purposes of a trade carried on by a partnership of which
one, some or all of the trustees are members.
8.
Paragraph 3 alters the definition of a qualifying company.
Shares are business assets if they are shares in a qualifying company
by reference to the person making the disposal.
9.
The provisions extend qualifying company status to a non‑trading
company where an individual is an employee or officer, provided
that s/he does not have a material interest in the company
or in a company that controls it. Similar provisions apply
to shares held in the holding company of a non‑trading group.
10.
When considering whether an individual has a material interest, the
interests of persons who are connected with the individual
are taken into account.
11.
The provisions make a similar change when the trustees of a settlement
make a disposal: a non‑trading company where an eligible
beneficiary of the trust is an employee or officer becomes a qualifying
company, subject to the material interest test.
12.
Holdings of units in a unit trust will not be eligible for business
assets taper relief.
13.
Paragraph 4 defines a material interest. A person has
a material interest if s/he has more than 10% of any one or more of:
- Any class of share or security of the company;
- Voting rights
in the company;
- Rights to
profits available for distribution; or
- Rights to
assets on the winding up of the company or in other circumstances.
14.
Shares or rights that are held indirectly or conditionally or that
a person will be entitled to acquire in the future (for example possession
of an option to buy shares) are treated as existing shares or rights
of the person whose interest is being assessed.
15.
The rights that a person has may be to assets that do not yet exist,
for example a right to acquire shares that are unissued and that would
be issued on demand. If so, the same number of unissued shares is
added both to the holdings of the person and to the total number of
issued shares of the company when assessing whether the person has
more than 10%.
16.
Paragraph 5 inserts new definitions of non‑trading
company and non‑trading group.
17.
Paragraph 6 provides that the rules governing the relevant
connections of joint venture companies are subsumed without diminution
in the rules for joint enterprise companies.
18.
Paragraph 7 introduces joint enterprise companies (JECs).
JECs are companies where 75% or more of the ordinary share capital
is held by five or fewer companies. An investing company has to have
a qualifying shareholding of more than 30% of the ordinary share capital.
The investing company, the JEC and certain other companies are treated
as having a relevant connection with each other.
19.
Capital Gains Tax (CGT) taper relief was introduced in the Finance
Act 1998.
20.
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.
21.
Different taper rates apply to business assets and non‑business
assets. The business assets rate offers more relief, faster: after
four years, the maximum taper rate is reached, when only 25 per cent
of a gain is charged to tax. For non‑business assets, the maximum
taper rate is reached after ten years when 60 per cent of a gain is
charged to tax.
22.
Business assets include assets used by the person making the disposal
for the purposes of a trade and shares in a person’s qualifying company.
Under the existing rules, shares in a company qualify as business
assets when disposed of by an individual if the company is a trading
company or the holding company of a trading group and at least one
of the following conditions applies:
- The individual is an employee or officer of the company;
- The company
is unlisted;
- The company
is listed and the individual is able to exercise not less than
5% of the voting rights.
23.
Assets other than shares may also be business assets in some cases
by reference to the qualifying company test, for example assets let
by an individual to a qualifying company and used by it for the purposes
of a trade.
24.
Most business activities are trades. Investment in property and in
shares (including venture capital) are not. In addition, a company
that is mainly trading may have too much non‑trading activity
to count as a trading company for taper relief: if so, it would be
a non‑trading company.
25.
Shares are defined under paragraph 22(1) of Schedule A1
to TCGA as including securities. Employee includes part time
employees. Officer includes directors of a company. Eligible
beneficiary is defined in paragraph 7 of Schedule A1.
The rules for setting out who is a connected person are in
Section 286 TCGA: connected persons include an individual’s
husband or wife, close relatives, business partners and certain companies
and trustees. A company is held to control another by reference
to the definition in Section 416 of the Income and Corporation
Taxes Act 1988.
26.
An individual holding shares in a company would also benefit from
business assets taper relief if s/he is an employee or officer of
a company that has a relevant connection with the company in
which the shares are held. A relevant connection is defined
in paragraph 22 of Schedule A1. It includes companies in
the same group and will include JECs.
27.
Joint venture companies (JVCs) as defined in paragraph 23 of
Schedule A1 are also JECs – JVCs have to be trading, while JECs
do not. The relevant connection rules for JECs are no narrower
than the existing rules for JVCs and subsume them.
28.
For assets that were held before 6 April 2000, the rules on entitlement
to business assets taper relief in Finance Act 1998 will continue
to apply in respect of periods before 6 April 2000, and gains
may need to be apportioned into gains on a non‑business asset
and gains on a business asset.
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