You have been a grower for longer than you care to remember, and you want to sell your business and retire. The land you bought years ago is now worth a fortune; the equipment will obviously have lost money. Have you thought how capital gains tax (CGT) will affect your business sale?
CGT arises on the disposal of an asset; in this case, your land and the assets within the business. Most assets people invest in are caught.
Most disposals are sales and, for CGT purposes, they generally take place on the contract date, not completion date. A part disposal can give rise to a capital gain. If an asset is destroyed - a warehouse is burnt down - and you receive insurance money, that is also a disposal.
The gain for tax purposes is essentially proceeds minus cost. But there are various things that can be deducted as well; here, the sale of the yard would mean that you could deduct the original costs of purchase, the costs of sale and the costs of any improvements you made.
In 2007-08, the rate of CGT is your marginal rate of income tax. So anyone who is a higher rate taxpayer will see CGT at 40 per cent; someone who pays at basic rate will pay at 20 per cent (not 22 per cent). This is the big change for CGT - the rate became a flat 18 per cent on April 6 this year.
There are reliefs from CGT, and this is where it starts getting complex. The main reliefs include an annual exemption (£9,600 in 2008-09), indexation relief (adjustment for inflation), taper relief (which reduces the effective tax rate), rollover relief (for re-investing gains on business assets), chattels relief (single items sold for under £6,000 are usually CGT free), losses - for example, your trucks and your main residence.
Indexation was introduced in 1982, and gives an extra deduction for inflation on any asset owned in the period 1982-98. Indexation is calculated by reference to the increase in the retail prices index (RPI) over the period of ownership.
Taper relief - introduced from April 1998 - rewards longer-term investment by reducing the proportion of the gain that is chargeable over time.
Business assets are primarily your own business, assets used for the business - trucks and equipment, shares in unquoted companies and shares in the company you work for or in which you hold at least five per cent of the shares (generally a trading business). Non-business assets are everything else. The taper relief for business assets means only 25 per cent of the gain is chargeable once it has been held for two years; non-business assets reduce to 60 per cent chargeable, but only after 10 years.
Both indexation and taper relief were abolished for disposals after April 5, 2008. That is the other side of the reduction in rate to 18 per cent, and gives a mix of winners and losers. Winners are generally those with non-business assets; losers are those with business assets who would have usually been expecting an effective CGT rate of 10 per cent.
There will, however, be a new ‘entrepreneurs’ relief’. Someone selling a business, or shares in a business in which they own at least five per cent (and which they have held for at least one year), will be allowed to make gains of up to
£1 million, and pay tax at effective 10 per cent rate before the full 18 per cent rate kicks in on any balance.
You can get relief for losses. Here, you total up all your disposals for the tax year, and offset capital gains and any genuine capital losses you have realised in the tax year to get to a net result for the year. If that netting off produces a gain, you can offset your annual exemption to give a lower net gain, or eliminate the gain entirely.
If the net result for the year is a loss, that carries forward to the next year and offsets gains there. But you only offset enough to reduce the net for the year to the amount of the annual exemption.
John Whiting is chair of the Chartered Institute of Taxation’s Management of Taxes sub-committee and a tax partner with PricewaterhouseCoopers LLP.