Darling introduces entrepreneurs capital gains tax concession

Chancellor Alistiar Darling

The Treasury has partially backed-down on plans to scrap tapered capital gains tax by introducing a concessionary rate of tax for entrepreneurs.

On Thursday, the chancellor Alistair Darling confirmed plans first announced in last year's pre-Budget that an 18% flat-rate of capital gains tax will be introduced from 6 April 2008. However, the compromise for entrepreneurs means owners of small business as well as employees and company directors who own at least 5% of shares in the company will only pay 10% capital gains tax on any profits under £1 million.

The concession was introduced by the Treasury following criticisms that the flat-rate could deter small businesses in the UK.

Paul Mumford, senior fund manager at Cavendish Asset Management, has welcomed the move. He says: “Keeping the essence of the pre-Budget’s proposals, while redressing the balance for small businesses, was precisely the shot-in-the-arm the markets needed at a volatile time for equities.”

But Jason Hollands, of F&C Investments, warns the exemption will not help ordinary investors who hold less than a 5% stake in a company, as well as investors in unlisted companies and AIM shares.

He says: "Since the relief is only available to sizeable shareholders of trading companies, it could also be very bad news for many British workers who have small shareholdings in large or medium sized companies and who will no longer benefit from taper relief."

Capital gains tax is a levy on any profit made from the sale of assets including shares, investments or second properties. Before these changes, the Treasury imposed three rates of tax – 10%, 20% and 40% - depending on the individual’s income tax band.

The annual capital gains tax allowance (currently £9,200) will continue to stand as will exemptions for cars, first homes and assets passed between spouses.

The changes have largely been welcomed by organisations that represent small business owners.

But others are less impressed - ifs ProShare, a not-for-profit organisation that supports employee share ownership in the UK, warns over 270,000 Save As You Earn (SAYE) employee shareholders will be negatively affected by the news.

The current capital gains tax regime means that basic rate taxpayers who have held shares in their employer for at least two years are only subject to a 5% charge.

But the changes mean that they will have to pay an additional 13% tax on any gain above £9,200.

Fiona Downes, head of employee share ownership at ifs ProShare, says the changes are likely to have an impact on medium and long term-saving through employee share ownership, damaging moves towards wider share ownership as a means of saving for the future.

She says: “SAYE participants should speak to their employer about the range of choices available to them or seek financial advice.”

Patricia Mock, private client services director at Deloitte, adds: “Those with shares in their employing company (unless they have more than 5%) will not be able to benefit from the 10% rate, and will see their gains being taxed at 18% instead of 10%.

“This will affect not only executives, but also staff generally, many of whom participate in approved share schemes.

“Indeed if the gains are in their basic rate tax band, their current rate is 5.5% rather than 10%, so their tax rate will increase by over three times to 18% as a result of these changes.”