This year the Chancellor's Pre-Budget report caused quite a stir, especially the proposals for changes to Inheritance Tax (IHT) and Capital Gains Tax (CGT). It has been widely observed that the IHT change, which permits the transfer of any unused nil rate band between married couples and registered civil partners, was introduced in response to the Conservative proposals to expand the nil rate band.
The big changes proposed are:
Lets explore what the CGT changes might mean for principals. First, if you are considering or negotiating a sale of your businesses, entering into a binding unconditional contract before 6 April 2008 will probably secure an effective 10% rate with the benefit of full business assets taper relief that will be available for qualifying business interests after two years' ownership. Taper relief reduces the gain by 75%. A 40% rate applied to 25% of the gain delivers an effective 10% rate on the overall gain.
The new 18% rate will effectively increase the CGT rate on business sale proceeds by 80%. If you are starting from scratch to sell your practice and need to find a purchaser, then it will be hard for the principal to do anything about this opportunity, unless you act very quickly!
What the change does mean is that for those relying on the proceeds of a post-5 April 2008 sale of their practice, the price will have to be substantially higher to yield the same net benefit.
For example, with business assets taper relief, £1m would yield £900,000 net. With the 18% rate (after 5 April 2008) £1m would yield a net amount of only £820,000!
It has recently been reported that, in response to strong representations by the CBI and the Federation of Small Businesses, the Treasury is considering the introduction of some form of retirement relief, providing that the first £100,000 of gains on the sale of your business (combined with exit from the business) will be free of Capital Gains Tax (CGT) subject to the satisfaction of certain appropriate conditions. Such relief would be better than nothing but whether this, or any further change to the original proposal for a flat 18% rate and the abolition of taper relief and indexation relief for individuals, actually occurs remains to be seen.
So in the meantime, based on the CGT proposals as they stand, what are the key messages for principals? Well, dentists who are contemplating a sale should consider this. I must stress that the proposal is not law yet but there is a very strong chance that it will be come in to play, but possibly with some further changes.
The proposed change represents a further, very valid, reason to challenge the "my business is my pension" approach to retirement planning.