Investments
Capital gains tax issues arise in relation to investments in companies or partnerships. If a loan is given to a sole trader, partnership or private company, a CGT loss may arise if the Revenue is satisfied that the loan has become irrecoverable. There are various conditions. In particular the borrower must be resident in the UK and must not be connected to the partnership or company. The borrower must not be the lender’s spouse or partner and the loan must be made for the purpose of a trade carried out.
A loss may arise on the disposal of shares in a private company. Normal CGT loss relief is available i.e. the loss can be set off against present year and future capital gains.
If new shares are taken up in a company it may be possible to set the loss on their sale or disposal or when the shares become of negligible value off against income tax subject to certain conditions. The company must not be a quoted company. It must be a trading company and the trade must not have consisted of dealing in shares, security of land or commodities. The loss is calculated in accordance with normal CGT principles. If the loss is eligible the individual may chose to set it against taxable income for the year in question or the preceding year.
Investment Reliefs
A UK resident can transfer certain types of asset to another UK resident at no gain or loss and claim using “roll over relief” in certain circumstances. This relief applies only to business assets. Business assets include assets used in a business, trade, profession or vocation, certain shares in a trading company, and agricultural land which qualifies for inheritance tax, agricultural property relief. The relief is clawed back if certain conditions are not maintained afterwards.
This relief applies where a person sells an asset used by him in a trade and reinvests the proceeds in replacement assets used for business purposes. The assets must fall into certain categories. The replacement asset must also fall into one of the categories. The replacement asset must be acquired within the period starting one year before and three years after the date of disposal. In effect the new assets are deemed to replace or substitute the old assets so that CGT will not arise until the ultimate disposal of the replacement assets.
Property acquired for letting as holiday accommodation may qualify as a business for this purpose.
There is relief where business and assets are transferred to a company for the purpose of restructuring. This is to facilitate the incorporation of businesses on a tax neutral basis. Certain conditions apply. Business assets, other than cash must be transferred to the company. A similar relief is available where a partnership transfers its business into a company.
The former taper relief for business assets has been abolished since 5th April 2008.
Entrepreneur’s relief was introduced in April 2008 to remove the wide spread unease after the introduction of the 18% flat rate and the abolition of taper relief. This is because taper relief caused an effective rate of 10% in many instances.
Entrepreneur’s relief is only available if an individual has been in business as a sole trader or partner or employee of a personal trading company for at least 12 months. There must be a disposal of all or part of his interest in the business which is a trading business and not an investment business. Where entrepreneur’s relief applies the gain is reduced by 4/9ths making an effective tax rate of 10%. The maximum amount of the relief is £1,000,000.00.
A company qualifies as a “personal trading company” only if he owns 5% of the share capital and is an officer of the company and the company is a trading company.
