Definition
Taper Relief: Formerly, taper relief was applied in computing the Capital Gains Tax (CGT) charge on a capital gain in the U.K. It offered a reduction on CGT for assets held over a stretch of time, encouraging long-term investment. The maximum reduction was 40% for a non-business asset and 75% for a business asset. Introduced in 1998, it was abolished in April 2008 and replaced by Entrepreneurs’ Relief, due to concerns that private equity firms were exploiting this relief to avoid substantial tax payments.
Examples
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Business Asset Example:
- John owned shares in a small business, which he sold after holding them for five years. Under taper relief, John would have received a reduction on his CGT liability by up to 75%.
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Non-Business Asset Example:
- Sarah sold a rental property she had held for seven years. As a non-business asset, Sarah would have been eligible for a taper relief of up to 40% on her CGT liability.
Frequently Asked Questions (FAQs)
What was the purpose of taper relief?
Taper relief aimed to encourage long-term investment by providing significant tax reductions on capital gains for assets held over extended periods.
How did taper relief work?
The relief reduced the effective rate of CGT the longer the asset was held. This period could give reductions of up to 40% for non-business assets and 75% for business assets.
Why was taper relief abolished?
Taper relief was abolished in 2008 because of concerns that it facilitated tax avoidance, especially by private equity firms who used it to significantly reduce their tax liabilities.
What replaced taper relief?
Taper relief was replaced by Entrepreneurs’ Relief in April 2008, which provided a 10% tax rate for qualifying business disposals under certain conditions.
How did taper relief differ from Entrepreneurs’ Relief?
Taper relief scaled tax reduction based on the length of asset holding, whereas Entrepreneurs’ Relief offered a straightforward 10% tax rate for qualifying business disposals, focusing more directly on entrepreneurial gains.
Can taper relief still be applied to assets sold today?
No, taper relief was abolished in April 2008 and cannot be applied to assets sold today.
Who benefitted the most from taper relief?
Business owners and investors holding assets over a long term benefitted most from taper relief due to the significant reductions available.
Was taper relief available to everyone?
Yes, taper relief was available to all qualifying taxpayers in the U.K. who held assets for a sufficiently long time.
Did any similar tax reliefs exist in other countries?
Many countries have various forms of capital gains tax relief, though the specific mechanisms and terms can differ significantly.
Where can I find more information about Entrepreneurs’ Relief?
Official government websites and financial advisory firms offer detailed information regarding Entrepreneurs’ Relief, its application, and qualification criteria.
Related Terms
- Capital Gains Tax (CGT): A tax on the profit when you sell an asset that has increased in value.
- Entrepreneurs’ Relief: A replacement for taper relief, offering a 10% tax rate for qualifying business disposals.
- Private Equity Firms: Investment firms that acquire equity ownership in private companies.
Online Resources
- gov.uk: Capital Gains Tax
- Financial Times: Tax Relief History
- HM Revenue and Customs (HMRC) Guide on Entrepreneurs’ Relief
Suggested Books for Further Studies
- Taxation of Company Reorganizations by Peter Arrowsmith – A detailed text on the complexities of business taxation.
- Taxation of Capital Gains: Principles and Planning by Anne Fairpo – In-depth analysis of capital gains taxation and planning principles in the U.K.
- The Oxford Handbook of Private Equity by Douglas Cumming – Covers a broad spectrum of topics including taxation impacts on private equity.
Accounting Basics: “Taper Relief” Fundamentals Quiz
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