Capital Gains Tax Cut For UK Investors

by Jason Gorringe, Tax-News.com, London

25 June 2001

The package of measures announced last week by UK Chancellor Gordon Brown to encourage entrepreneurship includes a tax break which will probably light a fire under the country's junior stock market, the Alternative Investment Market (AIM).

In future, individuals who own shares in an AIM company will benefit from a rapid taper in the rate of Capital Gains Tax (CGT) applying on disposal, from 40% to only 10% after just two years. The concession also applies to unlisted shares (which includes Ofex shares), and Enterprise Investment Scheme holdings. These types of asset all qualify as 'business assets': previously, the taper for business assets held by individuals began after two years and ended after 10 years at 24%.

The new rules will operate from April 2002; however, existing shareholdings will only benefit from the faster taper for a proportion of their value, corresponding to the length of time they have been held after 1st April 2002 as a proportion of the total length of time they have been held. In order to get around this, it's possible to sell and then re-buy the shares, leaving a month in between to avoid the anti 'bed-and-breakfast' rules. You just have to hope that the shares don't double in value during that month, as they are fairly sure to do according to the Russian 'law of buttered bread', which says that buttered bread always falls face down.

Another possible problem is that your AIM-listed company may transfer to the main stock market, in which case the accelerated taper ceases to apply - the shares are no longer business assets, so that you must either sell them or accept the change in tax basis.

AIM has already been successful, at least from the point of view of companies that have listed on it, although it hasn't been so great for investors. There are currently 572 companies on AIM, up from just over 400 a year ago; but its index has risen only 20% since the market was created in 1995, while the FTSE index has risen more than 50% in the same period. The index has also been highly volatile, although it could be argued that this has been due to the tech-stock boom and bust of the past 18 months, and that it will be less volatile in future.

For high net worth individuals, nonetheless, the new rules will make AIM, Ofex and unlisted share investments highly attractive, especially if they fancy their chances at stock-picking.

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