Pre-Budget Report 2008

Many local businesses could be worse off from next April as a result of the Pre- Budget Report. Alistair Darlings tax changes could create risk for small businesses that are NOT 'in the know.'

Of critical importance are changes to capital gains tax. At present, if you hold business assets, including unquoted shares, for at least two years; the amount of capital gains tax you pay on their sale is discounted to 75% of normal rates. That works out at just 10% tax for a higher rate taxpayer or 5% for a basic rate taxpayer. This is due to the taper relief, which was introduced by Gordon Brown in April 1998.

Now on its 10th birthday taper relief is to be abolished and replaced with a flat rate of capital gains tax of 18%. Indexation allowance for individuals and trustees (but not for companies) is also to be abolished from 6 April 2008. This will simplify the capital gains calculations, but it does not hide the fact that the potential 10% tax rate payable on the sale of businesses will jump to 18% from 6 April 2008.

Kate Brown, a tax expert from A.P Robinson & Co Chartered Accountants said that "the Pre- Budget Report plans are the biggest disturbance of capital gains tax in the past eight years that she has been practising as an accountant. "The affect of the changes, which were primarily aimed at private equity investors, is potentially wide reaching, with many smaller family businesses also feeling the change."

The Pre-Budget Report also revealed that people who are planning to sell their business, or an asset used by a business such as a commercial let property, which they have owned for at least two years then savings of at least 8% tax will emerge if they sell before 6 April 2008.

However, the news isnt all bad. The new flat rate of capital gains tax will be good news for anyone selling a non-business asset, such as a buy-to-let property. At present the maximum the taper relief for non-business assets is 60%, but only available after 10 years of ownership, which works out at 24% tax for higher rate tax payers and 12% tax for basic rate taxpayers. If you expect to make a large gain on a non-business property, it may be better to complete the sale on or after 6 April 2008 to save tax," furthers Kate Brown.

The annual capital gains exemption (currently 9,200) will be retained, as will other capital gains reliefs such as hold-over, roll-over and the deferral of gains using the Enterprise Investment Scheme.