When Alistair Darling delivered his pre-Budget report there was an unexpected change to Capital Gains Tax for individuals which potentially impacts the shareholders of unquoted companies, owners of some other business assets (like commercial properties), and employee shareholders or option holders in certain companies.

CGT was previously notionally charged at a taxpayer's top rate of income tax, but was subject to various reliefs such as indexation and more significantly for many, taper relief, which was at an accelerated rate in respect of business assets. The effect of business assets taper relief was to reduce the rate of CGT from 40% to 10% if a business asset, or shares in a company which qualified, had been held for at least two years.

The changes from April 6, 2008, however, include a single flat rate CGT charge of 18% which will apply with no indexation or taper relief available.

Given the Chancellor's principal objectives were simplification of the CGT system and an attack on the perceived preferential tax treatments for "fat cat" managers working in the venture capital industry, if we look at the losers and winners, the change results in some surprising consequences.

Among the losers would be a shareholder in an unquoted trading limited company who had held shares for the requisite two-year period and who decides to sell his company after April 5 2008. He will see his tax bill almost double from 10% to 18%.

Vendors who have already entered into sale transactions using loan note instruments may find themselves paying 18% on their gain rather than the 10% which they had anticipated when they entered into their transactions, if the maturity dates are after April 5, 2008.

Employee shareholders who sell shares in their employer and would otherwise have been treated as holding business assets for taper relief purposes will lose that benefit, with CGT potentially rising from 10% to 18% of any gain.

EMI (Enterprise Management Incentive) option holders will also lose one of the key tax benefits of their options as taper relief will not accrue on the option.

The winners, however, include anyone who holds assets which were not able to qualify for business asset taper relief - such as second home owners or buy-to-let property landlords - who see their potential CGT on sale more than halved from 40% to 18% if the sale process is deferred into the next tax year.

So, if you are an owner thinking of selling your business or company, it may be advantageous to proceed as soon as possible because the sales process takes time and the sooner it is started the more likely it is that is can be completed before April 5, 2008.

Darling appears to be listening to the business community with his more recent announcements by reintroducing a form of retirement relief - CGT exemption for people who sell their business and then retire. The tax allowance could be £100,000 or more but the Treasury has yet to finalise details of the scheme. Further changes are being urged by business to help serial entrepreneurs.

However, it is possible that the landscape may change as legislation is drafted and adjusted through Parliament, but the CGT climate from now until April 2008 seems as benign as it is likely to be for some time, and affected parties should give consideration to the options available.


John Rutherford is a partner with law firm McGrigors, in its corporate law practice.