Chancellor Alistair Darling tries to soften blow of capital gains tax reform

Chancellor Alistair Darling confirmed yesterday he still plans to scrap valuable tax reliefs on business assets like farmland, and introduce a new flat rate of capital gains tax.

However, in an effort to appease the business community, which slammed his original proposals, Mr Darling has proposed a new “Entrepreneurs” relief to soften the blow for smaller businesses.

Business Asset Taper Relief and Indexation Allowance will now be scrapped from 1 April, with a new flat rate of 18% levied on the sale of business assets.

Capital gains

But capital gains of up to £1m will be subject to a reduced rate of 10% in a bid to help entrepreneurs.

Any gains over £1m on sales of farmland will now attract tax at 18%. Under the old system, farmers could expect taper relief to reduce tax to just 10%.

Mr Darling said that gains made on different occasions would also qualify for the 10% rate up to a “cumulative lifetime total of £1m of gains”.

The Chancellor announced his shake-up of the capital gains tax regime during his pre-budget report last autumn. He said scrapping taper relief would make private equity firms “pay a fairer share”, but his plans provoked outrage from many business groups.

The Forum of Private Business, which represents smaller firms, said 97% of its members believed the original changes would have made the UK a worse place to do business.

More generous than expected

Accountant Mike Harrison of Saffery Champness, said that although there had been indications Mr Darling would offer some concessions, the £1m threshold was far more generous than many had expected.

“This will significantly relieve pressure on many rural business owners who may otherwise have looked to sell their businesses in a rush before April.

“However, some business owners have already sold up in anticipation of an 18% rate. But many of them may not have sold up had the tax reliefs unveiled today been made clear in the pre-budget report. Such individuals are likely to be highly dismayed by today’s u-turn.

“For those with larger business concerns, or development land, the new measures will not be far reaching enough. They will be disappointed that the Chancellor has discriminated against them.”

Holdings to sit below new threshold

Matthew Peters of Bruton Knowles suggested that some larger farms might consider dividing assets into separate holdings in order to sit below the new threshold.

“I think the chancellor knew he would have to make some form of further amendment as the proposed changes were so radical that they threatened to upset sensible business plans for many farmers.

“For example calculations using the proposed regime show that a farmer selling land before the changes would have been taxed at around £100/acre, but under the new system would have faced a bill for around five times as much tax.”

Step in the right direction

Philip Whitcomb of the estate’s team at solicitor Wilsons, said the Chancellor’s move was a “step in the right direction”, but might not go far enough for those planning to sell their farms after April.

Mr Whitcomb said the tax bill on 800 acres of land worth £5511/acre (compared with £1855/acre in 1982 – the base for capital gains) would have been £137,105 under existing tax legislation.

Mr Darling’s original proposal of an 18% flat-rate would have sent this soaring to £526,000.

Taking into account yesterday’s announcement on “entrepreneurs relief” the bill would be cut to £446,000.

Anybody thinking of selling their farm this year needs to weigh up all the options, including using rollover relief to reinvest any profits in a new business, he said.