UK Treasury Proposes Exemption Of CGT For Business Disposals

by Jason Gorringe, Tax-News.com, London

20 July 2001

The UK's Treasury (finance ministry) has published proposals for a reform of business taxation which include the abolition of capital gains tax on the disposal of substantial corporate shareholdings.

Some tax experts have complained that the Treasury's change of tack after a year spent consulting over a deferral scheme will just result in a delay to reforms, but most commentators welcomed the move. The Confederation of British Industry said: "We are very enthusiastic about this. It will enable firms to restructure at minimal cost, which is crucial in a world where companies have to respond quickly to a constantly changing competitive environment."

The proposal is contained in a consultation document published yesterday: Large Business Taxation - The Government's Strategy And Corporate Tax Reform Much of the document is devoted to self-congratulatory verbiage, but there is a technical appendix which details the capital gains tax change and also sets out the background to a possible change to the taxation of foreign dividends. However, the Treasury concludes that the current tax credit system is preferable to an exemption which would require complex anti-avoidance provisions.

The abolition of capital gains tax would cost £200m-£300m a year but the Treasury says it does not plan to claw back the tax through other changes and that the new system is compatible with changes already introduced to dividend taxation.

Under the proposals, gains are exempt where a qualifying shareholder company has held a large shareholding, defined as at least 20 per cent, in a qualifying investee company for 12 months. A 'qualifying' company is a trading company or a member of a trading group; the definition of 'trading' includes investment activity for a shareholding company but excludes it for an investee company.

The exemption automatically applies if the shareholder sells the whole 20 per cent. If the sale is less than 20 per cent, the shareholder has 12 months to sell the rest or face paying tax on the gains.

The Treasury says that the legislation, due to be published in the 2002 finance bill, will include clauses to protect the existing revenue base from abuse of the new rules through migration of companies and artificial residence changes. The definition of CFCs (Controlled Foreign Companies) may need to be extended.

The Treasury says that the new exemption will bring the UK into line with Austria, Belgium, Denmark, Luxembourg, the Netherlands, Portugal and Spain. Germany is also relaxing its corporate taxation regime.

Recommended