Taper Relief

Taper relief was replaced by Entrepreneurs Relief in April 2008 although initially it was introduced in 1998 to replace indexation, and to encourage long term-investment and has been extended dramatically since its introduction

Taper relief provides a valuable reduction in the capital gains tax payable on the disposal of assets, especially those with qualifying business use. The 2000 Finance Act extended the definition of a business asset; making the effective 10% capital gains tax rate available to more taxpayers and the 2002 Finance Act reduced the minimum holding period to obtain full business asset taper relief to only two years. The 2003 Finance Act extends the definition of a business asset even further, with effect from 6 April 2004.

Who can benefit from taper relief?

The rules apply to individuals, partnerships, estates and trusts. However, taper relief does not apply to entities liable to corporation tax (eg companies and unincorporated associations) for whom other tax rules, such as indexation relief, apply.

How does taper relief work?

The relief works by reducing the proportion of the capital gain charged to tax by reference to the length of time the asset has been owned. The maximum abatement is achieved after a holding period (defined below) of two years for business assets and ten years for non-business assets. Business assets (see overleaf) have a higher rate of relief than non-business assets.

What rates of reduction are there?

Gains on non-business assets are reduced by 5% per year, once the asset has been held for three years with a maximum reduction amounting to 40%. Business assets attract a maximum taper relief of 75% of the gain after two years of ownership. The table below illustrates the levels of relief according to the time held:

How is the holding period calculated?

Normally, the holding period is the number of complete years (not tax years) after 5 April 1998 that the asset is held. But for non- business assets held at 17 March 1998, the period is deemed to be increased by one year, subject to anti-avoidance rules. Therefore, a non-business asset purchased on 6 April 1995 and sold on 6 April 2004 would have a holding period for taper relief of 7 years; 6 years post 5 April 1998 plus the extra year because the asset was held on 17 March 1998 - although it was held for 9 years in total. The taper relief would be 25%.

A number of factors can affect the length of the holding period:

• where an inter-spouse transfer is involved, the holding period is the combined ownership period of both spouses (note that this may be extended to registered civil partners)
• where a no gain/no loss event has taken place (eg gains held over on making gifts, or gains rolled into shares onincorporation) the holding period is based on the new owner's ownership period or the holding period of the new asset
• gains deferred by reducing the cost of a replacement asset through roll-over relief only get taper relief by reference to the length of ownership of the replacement asset
• where a gain on a disposal is deferred to a later occasion through reinvestment, for example into an Enterprise Investment Scheme, the taper will operate by reference to the holding period of the asset on which the deferred gain arose.

The holding period will not include periods when the company was inactive, or when its value was artificially increased or reduced.