A capital gains tax rate of 10% on the disposal of business assets sounds almost too good to be true. And for some individuals holding shares in companies, it might be just that.

To qualify for taper relief at the business assets rate on the disposal of shares, the company must satisfy the definition of a 'trading company'. To the unwary, whether a company is a trading company or not may seem obvious. However, when you examine the definition of a trading company, there are potential problems that need to be addressed.

Any 'non-trading element' of a business must not exceed 20%. Otherwise there is a very real danger that the business may not be viewed as a trading company for business asset taper relief purposes.

20% of what?

The Inland Revenue has stated that it will look at some or all of the following:

Turnover

The assets of the company

Time spent by employees or expenses incurred by them in undertaking the company's activities.

If any of these apply, there may be problems obtaining business assets taper relief.

Should you be concerned?

The following situations are just two examples of where there may be problems:

If the company is in receipt of investment income, such as rental income, dividends or interest on deposit accounts, and such income accounts for more than 20% of the total income of the company.

 If the company holds large amounts of cash on deposit or has a substantial property portfolio, such that these assets account for more than 20% of the assets shown on the company's balance sheet.

(article date 03/2003)