Tax hike may damage your retirement plans

Changes in the rate of capital gains tax (CGT) in the UK could have disastrous financial repercussions for pharmacy owners who sell their business after 5 April 2008.

A simplification in the calculation of CGT was announced recently by Chancellor of the Exchequer Alistair Darling in his first pre-budget report.

CGT is paid on any business asset that has increased in value since it was bought. The new arrangement means that pharmacy owners could be levied with increased CGT when he or she sells any business asset, such as a pharmacy itself.

Anne Hutchings, chief executive of Hutchings & Co, accountancy and tax consultants who specialise in helping small businesses, comments: “The proposed increase in capital gains tax is a real blow to pharmacy owners, many of whom are depending on the sale of their business to fund their retirement. For most pharmacists, the proposed tax increase will mean their tax bill escalates by a massive 80 per cent if they sell their business after 5 April 2008.”

In the pre-budget report, the Chancellor announced that from 6 April 2008, the sale of any assets will be subject to a flat rate of CGT at 18 per cent, regardless of the duration that the asset has been held.

Current rules grant individuals with tapering relief on CGT, depending on the duration of ownership. If the asset has been held for more than one year but less than two years, only half the gain is taxed; a business owner would usually pay 40 per cent tax on the halved gain on the sale of his business.

If the business asset has been held for two or more years then only a quarter of the gain is taxable. In effect, a higher rate taxpayer (normally paying 40 per cent tax on their earnings) is charged at a rate of 10 per cent on the capital gain on the sale of the asset.

Following considerable lobbying from small business owners, it is rumoured that the Chancellor may exempt the first £100,000 of gains arising from 6 April 2008 if the individual is selling a business to retire. No formal announcement has been made yet on this relief.

Other tax relief measures known as “indexation allowance”, “kink testing” (also called March 1982 rebasing) and “halving relief” will be abolished. Although the application of these allowances is complicated, they may affect the tax levied on the sale of pharmacy businesses acquired before 6 April 1998. The new regulations are expected to raise £2bn for the Treasury over the next three years.

Any pharmacist who is considering selling his or her business over the next 12 months is advised to obtain a calculation of the likely CGT charge before and after the new rule is applied. An example of this consequence is shown in Panel 1 (below). This regulation may determine whether it is more beneficial to make the sale before 6 April 2008, or after.

The decision on CGT regulations is unlikely to be finalised until early next year.