Birmingham Post Article - July 2010

Lucas Markou, partner at Solihull accountants and business advisors Jerroms LLP, believes the CGT changes herald good news for the risk takers

George Osborne´s first Budget included good news for owner managers and others with substantial stakes in privately owned businesses. Many such investors will see their capital gains tax (CGT) bills reduced by the increase in Entrepreneurs´ Relief so that the first £5m of lifetime gains from qualifying business assets are taxed at only ten per cent rather than the full rate of CGT, now 28 per cent. Before this change, only the first £2m was taxed at a CGT rate of ten per cent compared with the old full rate of 18 per cent.

The potential of paying just one tenth of gains up to £5m brings a real tax saving and, if shareholdings are split between husband and wife, up to £10m of gain can be partially sheltered in this way.

However, there are conditions including the requirement that the shares have to be held by the individuals concerned for a year before the gain is crystallised. The effective cut in tax liabilities for entrepreneurs is a welcome recognition that such risk takers are going to continue to play a key role in our economy in the months and years ahead.

We are all ´in it together´but it is going to be the growing businesses and their founders and backers who will be the main drivers to navigating through today’s troubled economic waters. More generally, additional equity is good news for businesses, strengthening balance sheets and encouraging banks to lend more than they otherwise would.

There are other favourable tax treatments for equity investment too, including the Enterprise Investment Scheme (EIS). Unlike Entrepreneurs´ Relief, EIS is for investors who are unconnected with the business. It can provide tax relief at 20 per cent on the cost of investment, which must be made for at least three years. As the maximum level is £0.5m, the potential tax saving for an investor in any one tax year is £100,000. Future disposals are capital gains tax free too, making EIS doubly attractive to investors.

Venture capital trusts can be a useful source of cash injection for growing businesses too. There are tax breaks for investors in these funds, which can then invest in smaller companies. Shares in private businesses can also attract 100 per cent relief from inheritance tax (IHT). Care must be taken that the businesses concerned are not involved in significant investment activities if the relief is to be preserved.

All in all, the tax incentives can add to the returns from investment in our region´s growing businesses while giving companies the sound financial platforms they need