The Government’s controversial new Entrepreneur’s Relief regime will cause bitter frustration for sole traders and business partners according to a Midland tax expert.
Will Silsby, a director at Rabjohns, warned that, although attention has been focused on the effects of the regime for shareholders, the impact for partners and sole traders could be more far-reaching.
“If a sole trader ceases trading and puts their business premises up for sale, previous business asset taper relief would have meant their capital gains tax was 10 per cent, and it could still be with Entrepreneur’s Relief – but then again, it might instead be 18 per cent,” Mr Silsby said.
“And what single factor would account for the 80 per cent increase in their liability? Probably not the way the trader had used the property in their business, or the length of time it had been used in the business or even the size of gain made.
“Instead, everything could turn on whether the property was sold just before or just after the business closed down – in essence, the availability of Entrepreneur’s Relief depends on how quickly the purchaser of the property wants to take possession.
“You cannot always expect tax to work logically, but this really is a case of ‘it’s not what you do, it’s the way that you do it’.
“It is absurd that so much should depend on the timing of a transaction over which the seller might have little practical control. Current conditions in the property market mean that a seller cannot afford to hold out to achieve a sale of the property at or after the cessation of the business.”
Other potential losers are business partners who have made a property available to the partnership in which they work, according to Mr Silsby.
“Under taper relief they could expect a 10 per cent capital gains liability on the sale of their property, but under ER, they can only get a 10 per cent charge if the sale is made as part of their withdrawal from the business.
“Even if they retire completely, they still may not qualify for ER. If, for example, they had previously charged a full rent to the partnership, which would have made no difference under taper relief, there would be no ER on the property gain.
“There are two real problems here. In the first place, there is no adequate definition of what is a withdrawal from a business, resulting in a great deal of uncertainty.
“Secondly, this is another case of retrospective legislation – why should rental payments made before ER was even a twinkle in the chancellor’s eye deny relief?
“The absence of any consultation on the new legislation means that it will arrive on the statute book warts and all.
As a result, many traders and partners who might have expected relief will be rewarded with bitter frustration.”