Capital Gains Tax and Entrepreneurs’ Relief

As is now well known, the CGT rate stayed at 18% for 2010/11 following the Budget on 24 March 2010, with the annual CGT exemption unchanged at £10,100. It had been widely predicted that Alistair Darling would be forced to close the 32% gap between the top income tax rate for 2010/11 and the CGT rate, but this did not initially materialise.

Another unexpected announcement was the doubling of the entrepreneurs’ relief limit for qualifying disposals made on or after 6 April 2010 (S4 FA 2010). Subject to certain conditions being satisfied, individuals can claim this relief in respect of gains on the disposal of trading businesses which they run, either alone or in partnership, or of shares in a trading company (or the holding company of a trading group). Where shares are involved, there is a proviso that the individual is an officer or employee of the company (or group) with at least 5% or the ordinary share capital and voting rights. Gains qualifying for relief were originally charged to tax at an effective rate of 10% through the simple expedient of reducing the gain by a factor of 4/9ths and then applying the 18% charge.

Following FA 2010, the increase to a new limit of £2,000,000 applied to gains arising on or after 6 April 2010. Thus, if a taxpayer made qualifying gains before that date of, say, £1,400,000, the amendment did not give relief for the £400,000 which fell outside the old limit. However, if the same individual then made another business gain of £750,000 on 1 June 2010, that gain would be fully eligible for relief and a further tax break of £250,000 would still have been available.

However, in the Coalition Government’s first Budget on 22 June 2010, significant changes to the CGT system were announced by the new Chancellor. These comprised:
• an increase in the CGT rate to 28% with effect from 23 June 2010 in certain circumstances;
• a further rise in the limit for entrepreneurs’ relief to £5,000,000, also from 23 June 2010 onwards; and
• a modification in the way in which the new entrepreneurs’ relief is given.

These amendments have been legislated in S2 and Sch 1 F(No2)A 2010.