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The date of arrival for the flat rate of 18 per cent capital gains tax (CGT) has been set in stone for 6 April this year, but not before some help has been offered to small business owners in the form of a once in a lifetime £1 million capital gains allowance to be taxed at 10 per cent, says financial and business adviser Grant Thornton.

Small business owners will remain unscathed from the change to a flat rate this April thanks to the allowance, but serial entrepreneurs, bigger business investors, investors in fast growing businesses and private equity still face an 80 per cent increase in CGT.

Little long-term relief 

Francesca Lagerberg, head of national tax at Grant Thornton, says the announcement lays to rest months of uncertainty in the business community, but provides little long-term relief for entrepreneurs and employees with share option schemes.

Lagerberg says, "The CGT allowance of 10 per cent on the first £1 million of gains will have calmed a lot of nerves, but there are many that now face the prospect of hurrying through a sale of assets in a matter of weeks to take advantage of taper relief and the indexation allowance before it disappears for ever."

She believes the Chancellor's heart was in the right place when he moved to simplify the CGT regime, but says the proposal was improperly conceived giving no breathing space for business owners to sort out their affairs.

"Tax simplification is a very attractive but radical idea, so needs time to let people and the Treasury untangle the complexities in the UK tax system and ease business owners into the new regime and plan ahead," says Lagerberg.

Unacceptable state of limbo

The allowance, benefiting anyone selling assets with gains less than £1 million, will enable a business owner to pay CGT of £100,000 rather than £180,000 on the first £1 million of gains in their lifetime.

The allowance also cuts into pre-spent Treasury revenue that was to be gained from the move to a flat rate of CGT by some £200 million, a sum that the Chancellor had used to fund an increase in the inheritance tax (IHT) exemption announced in last year's pre-budget report and that will now have to be found elsewhere.

Lagerberg says, "As of today, the Chancellor has a backdated and increased IHT exemption of £300,000 per individual with only partial funding. With public finances stretched paper thin, I'm not sure where he'll find an additional £200 million to plug the hole come Budget in March."

Despite the obvious benefits of the allowance to UK heartland business, Lagerberg stopped short of congratulating the Chancellor on his announcement: "For most businesses, certainty is key, but they've been held in an unacceptable state of limbo since October last year as the Treasury tried to remedy this hasty piece of legislation."

She concludes, "In proposing the flat rate, I believe the Chancellor was blinded by his target of private equity and forgot about the small businesses that are the lifeblood of this country. That has now been set to rights, but I still despair for the UK's serial entrepreneurs."

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Related links

• HM Treasury
• Grant Thornton