What about indexation allowance?

The base cost of an asset purchased before 5 April 1998 and sold subsequently is indexed up to April 1998. Taper relief will apply to the gain after the deduction of indexation allowance.

How does taper relief affect shares?

For share acquisitions after 5 April 1998 each acquisition must be separately identified and will have its own holding period for taper relief purposes. The exceptions are rights issues (where the minimum shares under the offer are acquired) and bonus issues that attach to the pre 6 April 1998 shares to which they relate.

Shares are identified on a last in first out basis except that disposals and acquisitions on the same day are matched first as are acquisitions within thirty days after the disposal.

What if losses are involved?

Under taper relief, losses brought forward are offset against untapered gains, net of current year losses, insofar as they reduce them to the annual exemption. Taper relief only applies where the losses do not reduce gains to the exemption level. In practice it may be necessary to allocate losses to specific gains so as to maximise any available taper relief. Added complications arise where a person is assessed on settlement gains as a settlor of a trust. In these circumstances, personal losses, whether in the current year or brought forward, can now be used against the settlement gains deemed to accrue to the individual.

What shareholdings constitute a business asset?

• For disposals on or after 6 April 2000, the following shareholdings qualify as business assets:
  • any shares in an unquoted company (AIM-listed companies are treated as unquoted); or
  • a shareholding carrying at least 5% of the voting rights in a quoted company; or
  • shares held by an officer or employee of that company.
• The company must be a trading company or the holding company of a trading group. Particular care is needed if the company holds or acquires investments (including surplus cash). However, the 2001 Finance Act relaxed this requirement for employees of non-trading companies or groups. They will be entitled to business asset taper relief if they own less than 10% of the shares (which will include most employees of quoted companies).

Unincorporated businesses and unquoted companies

With regard to unincorporated businesses, any chargeable asset used by the owner in their trade will generally qualify as a business asset. There are detailed rules for partial use of an asset. In addition, if an asset is used by an unquoted trading company then, from 6 April 2000, relief can apply even though the lessor has no other connection with the company.

From 6 April 2004, any asset owned by an individual, the trustees of a settlement, or the personal representatives of a deceased person will qualify as a business asset if it used wholly or partly for the purposes of a trade carried on by:

• any individual, or any partnership which has an individual as a member; or
• the trustees of any settlement, or any partnership whose members include any person acting in the capacity of a trustee of a settlement; or
• the personal representatives of a deceased person, or any partnership whose members include any person acting in the capacity of a personal representative.

Care needed

Complex rules affect the above general concepts and great care must be taken to ensure initial and continuing qualification for business asset taper relief.

Particular care is needed where shares became business assets on 6 April 2000 or an asset used in a trade became a business asset after the changes on 6 April 2000 or 6 April 2004. With such assets, the gain is apportioned on a time basis using the ratio of the period of ownership that the asset was a non-business asset to the period that the asset was a business asset.

The relevant rate of taper relief is then applied to the business and non-business elements, but based in each case on the total period of ownership of the asset since 6 April 1998, and giving the bonus year relief, if applicable, to the non-business gain.

The calculation can give surprising results and there may be occasions when it is beneficial to end and recommence the ownership period such that there is no non-business element.

What action is needed?

• If you are setting up a new company, think about the share structure now.
• Review your company's activities and consider means of splitting out any substantial non-trading element.
• Avoid locking-up surplus funds in long-term investment products.
• Review the timing of disposals to maximise taper relief.
• Consider the effect on both accrued and future taper relief on any gifts, rollover, reinvestment or other transaction.
• Where business asset taper relief is in point, get specific tax planning advice before a sale or change of use.
• Where capital losses are involved planning may be needed to maximise any tax relief on the losses.
• Consider the potential impact of anti-avoidance rules, especially regarding close companies.

Who should I contact?

Taper relief is now potentially more beneficial but is also more complex than ever. This factsheet has highlighted some of the main issues. If you would like to discuss its contents or any other tax matters please contact the person at Grant Thornton who normally advises you or the office below.

© Grant Thornton UK LLP 2005 All rights reserved. Factsheet 65 - June 2005