Capital Gains Tax - Entrepreneurs to pay 10% on first £1 million

Following many months of lobbying by business groups across the UK, the Chancellor has announced a u-turn on the controversial CGT reforms he proposed in the 2007 Pre-Budget Report.

In the PBR, Alistair Darling said he would be abolishing capital gains tax taper relief and replacing it with a single 18% flat rate on the sale of business assets.

In what will be seen as a partial victory for business pressure groups, the Chancellor will now allow entrepreneurs to pay capital gains tax on the sale of business assets - up to £1million in value at 10%. The CGT rate on sales above this figure will be at the new flat rate of 18% when the new capital gains tax regime comes into place.

Importantly, the Treasury says the new relief, which takes effect from 6th April 2008, will allow the 10% on the first million of lifetime capital gains. Individuals will be able to claim relief for gains made on multiple occasions up to a cumulative total of £1 million. Gains in excess of the £1 million lifetime limit will attract the standard 18 per cent rate of tax.

The 10% 'concession' will also only be available to entrepreneurs who sell businesses in which they own at least 5%of the shares. Employees in share ownership schemes (or Save as You Earn) will still be liable to pay the new 18% CGT rate.

On announcing this backtrack to the House of Commons, Darling said that the concession would cost around £200m per year and benefit around 80,000 people.

The move is bound to please many thousands of small business owners, who would otherwise have faced an 80% increase in tax on the proceeds of any business asset sales.

Naturally, entrepreneurs lucky enough to earn over the £1m mark for their business sales are bound to be disappointed by today's announcement.

Although this latest concession may 'cost' the Government £200m per year, the changes will actually raise £700m - so today's announcement actually represents another major tax hike.