Taper Relief was introduced in 1998 to replace indexation and to encourage long-term investment. Taper Relief was extended dramatically throughout its ten years until it was replaced by Entrepreneurs’ Relief in 2008.
Taper Relief was useful for the disposal of assets, particularly those with qualifying business use, and provided a valuable reduction on the amount of Capital Gains Tax payable.
Two years after Taper Relief was introduced the Finance Act 2000 extended the definition of a business asset, making the Capital Gains Tax rate applicable to even more taxpayers. The Finance Act 2002 then reduced the minimum holding period, making taper relief applicable on full business assets after just two years. The Finance Act 2003 then extended the definition of a business asset further again and came into effect on April 6th 2004.
Who Benefited from Taper Relief?
The rules of taper relief applied to individuals, partnerships, estates and trusts. Taper relief did not apply to entities that were liable to Corporation Tax. For these entities, for example companies and unincorporated associations, other tax rules such as indexation relief applied instead.
How Did Taper Relief Work?
Taper Relief worked by reducing the proportion of Capital Gains Tax dependent on the length of time an asset had been owned. The maximum abatement was reached after a “holding period” which amounted to two years for a business asset and ten years for a non-business asset. Business assets had a higher rate of relief than non-business assets.
What Were the Rates of Reduction?
The rate of relief on business assets was initially 50% and then increased to a maximum of 75% after being held for the qualifying holding period of two years. The maximum rate of relief for business assets was 75%.
The rate of taper relief on non-business assets started at zero and after the qualifying holding period of 3 years started at 5%, increasing by increments of 5% per annum to a maximum of 40%.
|Number of years in
qualifying “holding period”
|Taper Relief (%)
|Taper Relief (%)
|10 or more||75||40|
How Was the Holding Period Calculated?
The holding period for business assets was calculated as the complete number of years an asset was held beginning form the 5th of April 1998.
For non-business assets the holding period was calculated for complete years where the asset was held from the 17th March 1998. Non-business assets were subject to anti-avoidance rules.
The holding period could be affected by a number of factors, including:
- Where assets were transferred from spouse to spouse, whether by marriage or registered civil partnership. The holding period was the combined ownership period of both spouses.
- When assets were transferred to a new owner and a “no gain/no loss” event occurred.
- Reducing the cost of replacement assets by roll-over relief meant gains deferred only got taper relief on the length of ownership of the replacement asset.
- Gains on disposal, deferred to a later date via reinvestment such as through the Enterprise Investment Scheme were also subject to a holding period dating from that with which the deferred gain arose.
The vase cost of assets purchased before the 5th April 1998 and subsequently sold were indexed up to April 1998. Taper relief applied to the gain after the deduction of indexation allowance.
Share acquisitions after the 5th of April 1998 had to be separately identified and, for tax relief purposes, have their own holding period. Rights issues were the exception to this rule.
Shares were identified on a last-in, first-out basis. Disposals & acquisitions on the same day were matched as were acquisitions within thirty days after the disposal.
Losses brought forward under taper relief were offset against untapered gain.
Definition of Business Assets
The following shareholdings, disposed on or after the 6th April 2000, qualified as business assets:
- Shares in an unquoted company
- Shareholdings carrying at least 5% of the voting rights in a quoted company
- Shares held by an employer or officer of the company
The company must have either been a trading company or the holding company of a trading group.
The Finance Act 2001 allowed employees of non-trading companies or groups to be entitled to business asset taper relief if they owned less than 10% of the shares.
Unincorporated Businesses and Unquoted Companies
Any chargeable asset of an unincorporated business was generally qualified as a business asset. If that asset was used by an unquoted trading company then since the 6th April 2000 taper relief was applicable despite the lessor having no other connection with the company.
Since the 6th of April 2004 any asset owned by an individual, trustees of a settlement or personal representatives of a deceased person was qualified as a business asset if it was used partly or wholly for the purpose of a trade carried out by:
- Any individual, or any partnership which has an individual as a member
- Trustees of any settlement, or any partnership whose members include any person acting in the capacity of a trustee of a settlement
- Personal representatives of a deceased person, or any partnership whose members include any person acting in the capacity of a personal representative.
Taper Relief was increasingly beneficial in the ten years that it was available for but it also became increasingly complex. Affected by complex rules great care was urged on those attempting to initially qualify for and then maintain their business asset relief.
In order to qualify for taper relief, considerable thought was required, particularly when setting up a new business – the share structure was an important factor.
The non-trading element of a company’s activities needed to be considered for splitting off.
Great care had to be taken to ensure that surplus funds were not locked up in long-term investment products.
The timing of disposals was important to ensure the maximum benefit of the relief.
Gifts, rollover, reinvestment and other transactions had to be carefully considered for the affects of accrued and future taper relief.
Before change of use, specific tax planning advice was required.
Anti-avoidance rules had to be considered, especially considering close companies.