03: Taper relief
Taper relief is very valuable but is due to disappear from 6 April 2008.
Taper relief reduces the taxable gains realised by individuals on business assets by 75% where the owner has held the assets for at least two years. In other words you only pay CGT on one quarter of the gain. If you pay tax at the highest 40% rate, in effect after taper relief your tax rate is 10%: 40% of 25%.
If you have owned the asset for at least one year but less than two years, taper relief reduces the gain on business assets by 50%, giving a maximum tax rate of 20% on the whole gain (40% of 50%).
Companies do not have taper relief. Instead the deductible cost of the asset is increased by an indexation factor related to inflation over the period of ownership. Taper relief is one factor to take into account when deciding whether to hold business property in a company, but there are several other considerations.
Business assets are broadly assets used in a trade, and property let to unlisted companies and unincorporated businesses. However if there is or has been any non-business use of the asset, only that proportion of the gain attributable to the business use qualifies for taper relief. An example might be a shop with residential accommodation above, or property that you previously used in your business but are now letting to a listed company.
If your use of an asset changes, you may be able to maximise taper relief – and therefore minimise CGT – by careful timing of its sale.
