The taper relief for business assets meant that if you had owned a business asset for two years or more, the effective rate of CGT on a disposal was only 10%. Business assets were widely defined, and included, for example, a property used by a business – it did not matter if it was your business or not, provided it was not a listed company. It was therefore possible for a landlord of a commercial property to let it out to the appropriate sort of business, and enjoy a CGT rate of only 10% when the property was sold.
Because the fact that the landlord received rent for the property was ignored for taper relief purposes, a common structure for a family company was for the business premises to be owned outside the company, and for the company to pay rent. This was a tax-efficient way for the owners of the company and the property to extract cash from the company, because the rent was an allowable expense for the company, and did not give rise to a charge to National Insurance Contributions in the way that a salary would.
When ER was announced as the replacement for taper relief, it was rather hastily cobbled together (like so much of the current Chancellor’s legislation), and was based on an old CGT relief known as Retirement Relief, which was phased out in the late 1990s when taper relief was introduced.
ER produces an effective rate of CGT at 10% on the first £1million of capital gains in an individual’s lifetime, provided the gain is on a business asset. I have written about the definition of a “business asset” in an earlier edition of the Insider, but broadly speaking a business asset includes:
· An “interest in a business” such as a partnership
· A trading company, provided you are a director or an employee and you have at least 5% of the votes on the shares
· An asset used for one of the above but owned personally
It is this last category, known as an “associated disposal” where the problem arose with rent.
An “associated disposal” happens when as part of the disposal of your interest in the partnership or the shares in the trading company, you also sell an asset (such as the business premises) which has been used for the purposes of the business. In such circumstances, you are entitled to ER on the disposal of the premises, assuming you have not already used your allotted £1million on the sale of the shares themselves.
The problem is that ER on an “associated disposal” is restricted if you have received rent for the use of the asset. The restriction depends on the level of rent received, so that if you have been getting a full market rent, no ER is available.
This was most unfair to those who had the common arrangement described above, with the premises owned outside the company and the company paying rent. Even if they stopped receiving rent now, the premises would be “tainted” by the rent paid earlier, so that if for example they had owned the premises for four years before ER came in on 6 April 2008, and they had received a market rent during that time, then even if they stopped charging rent from April 2008, part of the gain on a sale of the premises would not qualify for ER. If they sold the premises in April 2009, for example, four fifths of the gain would not be eligible for ER.
The government amendment changed this, so that periods before April 2008 are ignored when calculating the amount of any restriction for rent. So should you now stop charging your company rent? The question is not a simple one and you need to take advice from a tax adviser, but at least you will not be penalised for arrangements that existed before ER was introduced!
James Bailey
