Chancellor urged to overhaul gains tax

Businesses for sale: entrepreneurs hope for Budget relief

THE CHANCELLOR is being urged to make fundamental changes to the capital gains tax regime in next month's Budget to improve the environment for selling businesses. The Federation of Small Businesses is leading the lobbying, with calls for an abatement of CGT liability related to the length of ownership of a company. Owners who make short-term gains should be taxed more heavily than those who have displayed a long-term commitment to the enterprise, argues the FSB.

The current CGT rate of 40 per cent was set when the top rate of personal tax was 60 per cent, and there is a consensus among business representative bodies and accountants that entrepreneurialism should be better rewarded. Speculation suggests the CGT rate could be cut to 20 per cent.

A review of CGT was announced by Gordon Brown last year. "The rumours were that it would be root and branch change," says Patrick Stevens, a partner in Ernst & Young's entrepreneurial services division. "Then there was a 'leak' to suggest it would be adjustments only. So no one knows how big the changes will be. There are still suggestions of giving relief to entrepreneurs getting rid of companies."

Mr Stevens urges the Chancellor to take radical action. "We are one of the worst countries in the world for taxing people as entrepreneurs. The idea of CGT being the same rate as income tax is draconian."

Many tax experts expect the Chancellor to introduce a quid pro quo for cutting the CGT rate, by reducing the reliefs available. At present, retirement relief allows those over 50 to take the first pounds 250,000 of the sale price tax free, and be taxed at 25 per cent on the next pounds 750,000. Reinvestment relief is available on income that is put into another business.

But John Whiting, a tax partner at Price Waterhouse, says he would prefer the Chancellor to do nothing than to cut reliefs. "Leave things as they are," he urges. While he favours a reduction in CGT, he says it is irrelevant for the many owners of small businesses who retire and currently receive the income from the sale tax-free.

The Confederation of British Industry, though, is calling on the Chancellor to cut the CGT rate to 20 per cent and to replace retirement relief. With younger business owners playing an increasing role in the economy the CBI says it makes no sense to continue with a relief restricted to business sellers aged over 50. "We are calling for a new Entrepreneurship Relief with the arbitrary age limit replaced by more flexible criteria based on the number of years working full-time in a business and with higher monetary limits on the relief," explains a spokesman.

Mr Stevens also says that too little is done to help the real entrepreneurs. He cites the Enterprise Investment Scheme, which gives a minority passive investor generous tax relief compared with a majority active investor who has to pay full-rate tax. But he differs from the CBI in saying that the situation will worsen if the Chancellor graduates tax according to length of investment. He says the best thing for the wider economy is often for small firms to be sold early in their lives to larger groups to assist their expansion and that it would be perverse if this were taxed more heavily.

Vijay Thakrar, a tax partner at KPMG, welcomes the prospect of a cut in CGT and the introduction of entrepreneurial relief, but adds: "If we are to have a two-tier rate of tax then be sensible about the length of period before getting a lower rate; it should not be something like 20 or 30 years. And it should encourage people to go into business again. There is a lot of talk about reinvestment relief being restricted, and we hope that won't happen."

Richard Baldwin, a tax partner at Deloitte and Touche, agrees that more should be done to encourage disposing owners to start new businesses: "The incentive at the moment is to go non-resident, which does not do the UK economy much good. Most of them get bored with pounds 5m in their pockets, and they could be here setting up new businesses."

Mr Baldwin says, though, that we should not overlook the virtues of the CGT system. "Currently, the environment for capital taxes has never been better for private companies. It is a good opportunity to sell your business, or pass it on to a member of the family, without much of a tax cost."

The big question, of course, is whether possible changes to CGT should encourage owners to sell quickly or wait. Mr Stevens says: "There is no known answer, but I would have thought that on tax reliefs there is a good chance of being worse off after the Budget if you are of an age to take advantage of retirement relief, or if you are going to use reinvestment relief. But if you are not going to take one of those two reliefs, I would say you are probably better off waiting."