In his October Pre-Budget Report, the Chancellor announced that taper relief, which can reduce the effective rate of capital gains tax (CGT) to 10%, and the indexation allowance, which gives relief for inflation, would both be withdrawn from 06 April 2008. Instead, there will be a flat rate of 18%. When first announced, the proposal was widely condemned by business groups. The Chancellor has now confirmed that, despite the furore, the changes will go ahead. However, he has also announced that he will introduce a new entrepreneurs' relief to satisfy some of the criticisms. Although we have been given an indication of how the relief will operate, we are yet to be provided with the detailed rules.

Business owners and shareholders have been facing a potential tax hike from 10% to 18%, but the new relief will preserve the 10% rate for some (but only some) of those facing a potential tax increase. The relief will primarily apply to two types of gains. First, gains made by individuals selling their businesses. Second, gains made by individuals selling shares in trading companies, but only if they are a director or employee of the company and hold at least 5% of the shares in the company. These conditions will need to have been satisfied for at least a year. Although not completely clear, it is likely you can look to periods before April 2008 to test whether the conditions for the relief apply. In some cases the relief will also apply to family trusts. However, there is a lifetime limit of £1 million of gains. For that reason the relief is something of a damp squib for many successful entrepreneurs since it can only ever be worth a maximum of £80,000 in saved tax over a lifetime. The relief can be claimed on more than one disposal, but after an individual's cumulative gains exceed £1 million, tax at 18% will be payable on the excess. Therefore, if you sell a business and make a gain of £5 million, or if you sell five businesses over a lifetime and make a gain of £1 million on each, the relief will preserve the existing 10% tax rate on just the first £1 million. You will still face an almost doubling of the CGT on the rest of your gains. Further, the relief is no use if you do not own 5% of the company, do not work for the company, or if the company is an investment company - currently, you could potentially benefit from the 10% rate in these situations.

Although not yet clear, it seems likely that only gains arising from 06 April 2008 will count towards the £1 million limit. Taxpayers will therefore want to consider selling or otherwise disposing of assets before 05 April to take advantage of the current 10% rate without depleting their lifetime allowance. They may also want to consider re-arranging ownership of assets among the family so that more than one lifetime allowance can be used.

For those who currently qualify for the generous 10% CGT rate and who are unlikely to qualify for the new entrepreneurs' relief, there are tax planning techniques available to trigger a gain before 06 April without actually selling the asset and so preserve the 10% rate. These techniques are relevant to shareholders with less than 5% of the company or those who do not work for the company. These techniques equally apply to those whose gains are likely to exceed the £1 million limit. But urgent action needs to be taken before April.

www.mishcon.com

This article is only intended as a general statement and no action should be taken in reliance on it without specific legal advice.