Enterpreneurs Relief and pulling the rug from under the taxpayers' feet!

Today I will touch on an undesired development for property onwers that has literally removed the carpet from under their feet overnight!

Some time back in November 2007, the then government decided that capital gains tax was scandalously low, and so the Chancellor announced that he was making changes in the next budget to put up Capital gains tax (CGT).

He then in April 2008 abolished business asset taper relief and brought in what is known as Entrepreneurs Relief. Under this, capital gains made on disposal of assets owned by individuals and used in the trade are taxed on those persons at 10% up to an upper limit (currently £5 million). But, not quite so...

The point we are making is not with the particular kind of relief but with a certain condition contained in the new legislation: If a person owns the property used in the trade of his company, he will not benefit from the 10% rate when he sells (or disposes otherwise) the shares in his company together with the property if he has charged the company full rent all along for the use of the property to trade from. Instead, the CGT rate will be 28%!!!

Presumably, the justification for that is that the property is not a trading asset but an investment. Fair enough, what the heck! The problem is however where trading properties were purchased before 6 April 2008 and those traders were advised by their accountants back then to own the property personally rather than buy through their companies to make sure that they could benefit from the then Business Asset Taper relief, according to which CGT would be taxed at 10% provided the property was kept for at least 2 years. It was also a brilliant idea to extract rent from the company rather than salaries as there is no national insurance on rents (being treated as "unearned income").

What makes it worse is that those property owners also stand to lose the mortgage interest relief if they stop charging rent and will be unable to claim any capital allowances on fixtures fixed on the building as they will have no rental income to offset the capital allowances! Losing those reliefs could amount to higher taxes by hundreds of thousands in some cases!

Unfortunately, this shows that planning one's tax affairs within the foreseeable future is a very difficult task because of the uncertainty in the regulatory environment. I hate to say that all I can advise clients in this mess right now is to carry on charging rents so that no interest relief is lost and hope that the law will change before they sell (perhaps before an election!).

Please be free to add your own comments or similar experiences.