CGT loophole could cause problems for entrepreneurs

One of the most significant events to affect the corporate M&A market occurred this year when Alistair Darling increased the base rate of capital gains tax for most business owners from 10 % to 18%. This, of course, resulted in thousands of professional advisers and accountants trying to find ways around the tax.

One way to avoid the tax was to effectively 'sell' your business, prior to the 5th April, to a trust, otherwise known as warehousing. Capital gains tax rules judge the date of disposal as being when an unconditional contract is entered into, not when a deal is completed. The unconditional agreement was to sell the business to a trust contingent on finding a third party buyer. As such, this crystallised any gain so as to be liable for the 10% rate with a view to disposing of the business by the trust later in the year. This was the preferred option of Linda Bennett the owner of LK Bennett shoe store chain and Will Chase, potato farmer and founder of Tyrol's Crisps.

Stephen Herring of BDO Stoy Hayward says that hundreds of businesses chose this route to avoid the tax. In most cases these methods were employed for larger businesses as the treasury created entrepreneurs' relief that ensured gains of upto £1m.

So what is the problem? The difficulty could come where the company that is warehoused is no longer able or willing to be sold. In this case the Inland Revenue may consider that you have sold a company to your trust and then effectively bought it back by tearing up the unconditional sale agreement.. This would mean that you may face a large tax bill without the proceeds to pay it.

The Inland revenue has always maintained that advance clearance or approval may be given to any sort of tax avoidance measure including company sales. As such it could be that if anyone had any doubts they should have consulted the revenue first. If the economy becomes more fragile and many potential sales fall through then entrepreneurs will also be out of pocket on stamp duty and legal fees.

However, it is likely that in practice the inland revenue would not try and force this issue and demand payment of tax when no real benefit or proceeds have been realised. But the Inland revenue are not generally considered to be very generous so it is important to be vigilant.

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