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it pays to understand

17th December 1971
Page 44
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Page 44, 17th December 1971 — it pays to understand
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Which of the following most accurately describes the problem?

yourtax by R. H. Grimsley scorn. FlAc

19. Capital gains tax

CAPITAL gains tax is a long-term matter lying in wait while values are rising, and striking when assets are sold or given away.

The time to think of saving this tax is when planning to buy or change valuable assets which may eventually show a capital gain, rather than after they have been sold and it is too late to take avoiding action. It hits at genuine capital profits due to the higher real value of an asset, which seems reasonable enough as the equivalent of income tax or corporation tax on trading profit. But it also hits at the higher prices which are a symptom of inflation.

This is by no means so reasonable as it eats into the real capital which is the essential foundation for the business. Supposing a building cost £20,000 in 1965 and is sold in 1985 for £50,000 tax will be payable on a supposed gain of £30,000, whereas the entire £50,000 would be needed to buy a comparable building because the spending power of the £ has dropped that much during the 20 years.

For an individual there is a single basic rate of 30 per cent for this tax, with a slight reduction on an alternative scale for fairly small gains. Thirty per cent compares very favourably with rates going up to 88.75 per cent for income tax and surtax on trading profit, earnings or investment income. For a limited company the tax is at the same rate as corporation tax for the year in which the gain is realized. When a company has made a gain and paid the tax, if it distributes the net remainder to its shareholders there is a further lot of tax to be paid.

Small business This means there could be occasions, particularly in the small family business, when it is better for major assets such as buildings to be bought by the shareholder/directors personally rather than by the limited company with a view to saving tax when it is sold at some future time. However, this is by no means a clear general guide because other factors beside tax have to be considered.

There is also the useful point that tax on a capital gain made from selling a business asset such as a depot could be deferred indefinitely if the whole of the sale money is used to buy fresh permanent assets. For example, if the business has outgrown its first site and moves to bigger premises the tax could be deferred provided the simple rules about the roll-over deferment were observed. The main rules are that the tittle limit for the purchase takes place within 12 months before or 12 months after the sale of the old premises. It is even possible to get this limit extended if there has been an unforeseen delay and the inspector sees that there had all along been a genuine intention to relate the sale of the one asset with the purchase of the new one.

The fleet manager for an own-account operator is not likely to be troubled too much with this tax, his main concern being to watch the roll-over deferment if he has to press his directors to find him a larger depot. The haulier, on the other hand, could find it hitting at two substantial assets: (1) his premises; and (2) the goodwill of his business. Success in running a road haulage firm with steadily rising profits creates this asset of goodwill which rarely appears on the balance sheet but is found to have a very high value when the business is either sold or passed on as a gift to the next generation.

It will be seen that whereas a limited company is immortal, just so long as it remains solvent, and it never need pay capital gains tax, the owner of the company's shares, or a direct owner of a sole trader or partnership business must withdraw from the scene eventually and so bring a likelihood of capital gains tax. If he retires, however, and meets the essential rules about ownership, age and length of service, up to £10,000 of the gain may qualify for retirement exemption.

Major change

There has been a major change in 1971 relating to assets (including company shares) owned by a man when he dies. Formerly these would have been liable to both capital gains tax and estate duty, but the capital gains tax no longer applies.

Another change in the same year has been the ending of the short-term capital gains tax which applied when assets were sold after being owned for less than a year and which could have been a much heavier charge because it was calculated as income tax plus surtax on top of the individual's other income. It seldom affected genuine business investments because these were usually on a long-term basis but it could mean that a haulier who happened to have an unexpected, attractive offer for some premises he had recently bought could find most of the benefit disappearing in the short-term tax. Now it will not be of consequence how long he happens to have owned the premises.


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