Clause 45 - Taper relief: holding period for business assets
Finance Bill
12:15 pm
Mr Howard Flight (Arundel and South Downs, Conservative)
We have not tabled any amendments to the clause, but I want to make several points. The clause is a positive step, as it reduces the holding period necessary for business assets to obtain maximum taper relief. It has been broadly welcomed, but it does not address certain anomalies. For example, the holder of a business asset can never reduce his taxable gain to nil, whereas the holder of a non-business asset can do so, if indexation is greater than the gain.
That situation arises because the maximum taper relief is 75 per cent. of the gain and 25 per cent. is taxed. Indexation allowance, which applies to non-business assets provides an inflationary allowance such that the index cost of the asset is effectively what someone would pay today for the same asset, if it had risen in value by the rate of inflation. That means that only the real increase in value is taxed.
If an individual held a business asset since January 1985, with an original cost of £100,000, and sold it this year for £200,000, the unindexed gain would be £100,000. Taper relief would be £75,000, leaving £25,000 charged to tax, so he would have to pay tax of £10,000, if he was a 40 per cent. taxpayer. However, if the asset was a non-business asset, the individual would be able to claim indexation allowance of some £91,000, and pay tax at 40 per cent. of £3,460. That anomaly arises because the retail prices index increased by 91.34 per cent. from January 1985 to April 2002, which is the proportion that can be attributed to inflation. In that case, the holder of the non-business asset would be better off than the holder
of the business asset. Perhaps the Government would address that to allow the holder of an asset on which taper relief can be claimed to elect for indexation allowance to apply and for the asset to be treated as if it were not a business asset, if that would benefit him.
We will come to another anomaly in subsequent clauses, which has been pointed out by the Chartered Institute of Taxation. That is the unfairness of the situation that applies to someone who acquired shares in the company for which they work before September 2000. Supposing an employee, who was made redundant last month, sells his shares later this year and, through no fault of his own, finds that 25 per cent. of his gain is deemed to be a non-business asset. Assuming that he is a higher rate taxpayer, the marginal rate of tax will be 70.5 per cent. For every £1,000 gain, £250 will be taxed in full at 40 per cent., so £750 will be subject to 75 per cent. taper relief. Therefore, the total tax burden on each £1,000 gain will be £175, which is 70.5 per cent.
We have tabled an amendment to clause 46, a starred amendment, which would allow individuals, in calculating the length of ownership, to discount the time when the asset was used for non-business purposes. That would not help in the particular examples of retirement or redundancy, but it would deal with the unfairness between pre-2000 and post-2000 business assets.