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FOOL SCHOOL
That date marked a new path for CGT in many ways, apart from ending indexation. Among other things, it introduced the excessively complex Last In First Out (LIFO) identification rules for listed shares - replacing the far more sensible pooling idea that existed previously.
The introduction of taper relief in 1998 presented us with two distinct rates - one for Non-business Assets and the other for Business Assets. At the time, Business Assets meant, broadly, those used in a trade carried on by a taxpayer, either self employed or via a trading company, in which he owned at least 25%, or alternatively owned at least 5% and was employed full time.
Thus in general, the new 1998 rules did not extend Business Asset taper relief to most listed company shareholdings.
The Non-business taper relief provided, after the first three years of ownership, for a reduction in the chargeable gain commencing with 5% and increasing by 5% a year up to a maximum of 40% after ten years or more. This rule still stands.
The original 1998 taper rules for Business Assets started after one year of ownership at 7.5% reduction of the chargeable gain, increasing by 7.5% a year up to a maximum of 75% after ten years or more.
New Rules
It was in April 2000 that things really started looking up for the taxpayer. First, the definition of Business Assets was widened considerably to include the following, in addition to the existing definition of this:
Secondly, the BA taper relief timing was shortened very substantially. Instead of a ten year holding period to achieve maximum relief, this is now down to four, after which the 75% reduction in the chargeable gain applies. For the shares that already qualified as Business Assets on 6 April 1998, the full BA taper relief will start at the earliest from 6 April 2002. For those now included in the wider definition, the effective date is 6 April 2000 so full taper relief will be applicable by 6 April 2004.
For disposals of BAs held under four years, the scale of reduction is 12.5% if held for over one year, 25% if held for over two years, and 50% if held for over three years but less than four years.
Note an important point here though. The BA taper relief on those assets that became BAs from 6 April 2000 applies only to the element of the gain that accrues after that date. Thus, if you make a gain on an asset acquired 6 April 1999 and sold on 6 April 2004 (bearing in mind that it only qualified as a BA on 6 April 2000 due to the new rules), then only part of the gain qualifies for BA taper relief. The balance would only qualify for Non BA taper relief.
Because the current maximum rate of CGT is 40%, for a BA disposed of after 6 April 2002, assuming it was a BA in 1998, the effective rate becomes 10%, an oft mentioned figure. The reasoning is that, as the relief is 75%, then 25% of the gain remains taxable. Applying tax of 40% to 25% of the gain gives you 10% as the effective tax payable on the chargeable gain.
Pure investment shares in fully quoted companies, where there is no employment, or where the holding is less than 5%, continue to attract only the much lower rates, and longer holding periods, of standard taper relief outlined above. Thus the maximum reduction in the gain for an investment asset such as shares, is 40% after ten years from 6 April 1998, although an additional year is granted for assets held at 17 March 1998. This leaves 60% as taxable. Applying tax of 40% to 60% of the gain gives you 24% as the effective tax payable in this case on the chargeable gain, but that can't happen some years yet. Not that attractive, and certainly not a reason by itself to hang on to a share for ten years. Lower relief applies to shorter holding periods, but nothing at all for the first three years as shown above.
Enormous complexity can arise with BA taper relief on those assets like employee shareholdings, or any unquoted shareholdings, which only became BAs from 6 April 2000. There will be a very large number of these. And, if the asset was owned prior to 6 April 1998, up to which date indexation applied, the fun really starts.
Summing up then, the BA taper relief rules give a generous reduction in the chargeable gain of any asset qualifying as such. The extended definition afforded under the Finance Act 2000 to BAs will eventually reduce the CGT rate right down to an effective 10%.
It means that with such a low rate, after only a four-year wait, there is little incentive for the complex or radical tax planning measures which previously existed. In the past people left the country, or set up complicated and expensive trust arrangements. Now, even the smaller employee type shareholding, which has led to pretty large sums of money being made by many people on share incentive schemes, no longer has much tax fear associated with disposing of the shares, where they have been held for the full qualifying period.