THREE months ago Chancellor Alistair Darling presented his plans to simplify the Capital Gains Tax system through the removal of indexation allowance and taper relief in favour of a flat rate tax at 18 per cent.

Although this was initially seen as good news it soon became apparent that it would seriously affect business owners though the removal of the very generous business asset taper relief.

These new rules were due to take effect from the April 6, causing many business owners to consider whether or not to continue into the next tax year.

Currently if you have been in business for more than two years, full business asset relief will be available on disposal. This will result in only 25 per cent of the gain being chargeable for tax purposes at a maximum of 40 per cent.

An initial gain of £100,000 will become a chargeable gain of £25,000 after taper relief (ignoring the annual exemption). This, taxed at a maximum of 40 per cent, will result in a tax bill of £10,000 giving an effective tax rate of 10 per cent. Under the proposed rules, this tax bill will rise to £18,000.

Consequently over the last three months the business community has been putting an enormous amount of pressure on the new chancellor to provide some relief on business disposals. It is widely feared that without any such relief people could be deterred from starting up in business causing future problems for Britain's economy.

This pressure paid dividends last week when Alistair Darling rewrote his own rules before they had even come into effect. A relief for entrepreneurs on the first £1 million of any qualifying gains was announced, which would result in them being taxed at 10 per cent rather than 18 per cent.

This £1 million is a cumulative lifetime total meaning that gains made on different occasions from April 6 will also qualify for the 10 per cent until the limit is exceeded when gains will be taxed at 18 per cent. This will require accurate records to be maintained by entrepreneurs that make serial investments to ensure that the correct rate of tax is applied.

For many of Britain's smaller business owners this has been welcomed as good news as they will be better off under the new rules. Larger entrepreneurs are not as fortunate because gains over £1 million will be taxed at 18 per cent, resulting in a higher tax liability than would currently be the case.

Full-time employees of trading companies who have invested in shares possibly through incentive schemes have also been given no assistance.

These individuals who have obtained shares by virtue of their employment will not qualify for this new relief, unless they own more than five per cent of the company. They will be taxed at 18 per cent.

Under the current rules the gain on disposal of these shares would be reduced by taper relief, increasing for each year of ownership. They will be much worse off under the new regime.

At this time the Chancellor has not released any further details on the Entrepreneurs Relief which still leaves a lot of uncertainty surrounding businesses.

Business owners approaching retirement or contemplating sale should still take advice on the possible tax consequences.

  • Mark is with Hunter Gee Holroyd Chartered Accountants & Business Advisors