PKF warns CGT concession leaves business owners with a tricky decision
Businesses could benefit from a further change to capital gains tax rules, say leading Accountants and Business Advisers PKF East Anglia.
While the Chancellor's original changes sparked uproar earlier this year, a small amendment to the rules for entrepreneur's relief (ER) in the Finance Bill, means rent paid by business owners before 6 April 2008 will be ignored for ER calculation purposes when a business property is sold.
It is common practice for business owners to hold property used in their personal companies in their own name and charge the company rent for use of the property. The rental receipts are taxable in the hands of the individual but are not subject to NIC, while the rental payments are tax deductible for the company.
Peter Harrup, partner and corporate tax specialist at PKF Ipswich, which also has offices in Norwich and Great Yarmouth, welcomes the concession. 'It removes a retrospective penalty for business owners, but it also leaves those thinking of selling up with a tricky decision - should they stop charging their company rent so more entrepreneur's relief is available on the eventual sale, or continue to charge rent for the short-term NIC savings?'
With entrepreneur's relief, business owners pay just 10% on gains made on the sale of their businesses up to the first £1m of gain. However, if an owner sells his company and the business premises together, this 10% rate is not applicable on the property gain where the company has paid market rate rent to the owner for the property.
In effect, thousands of business owners who charge their companies rent for using their premises would not have qualified for ER on the sale of that property after 6 April. The amendment changes that - so now business owners will not be retrospectively penalised for charging rent to their businesses.
Mr Harrup continues: 'For those who do decide to stop charging rent now, I hope HMRC will take a sympathetic approach to rents paid in April, May and June - when business owners did not know this concession would be made.
'Going forward, company owners must make a decision as to which tax saving they value more: the future availability of ER or the NIC-free receipt of income from their companies.'
He adds that in the current economic climate business owners may decide to carry on 'business as usual' so denying themselves any advantage from this ER change. 'This makes it the ideal concession as far as the Chancellor is concerned: it is fair to business owners and, in practice, could cost the Treasury very little.'