SWEEPING changes are being made to the rules on capital gains tax (CGT) which could have major implications for business owners and investors looking to sell their assets.

Under changes announced in the Budget, retirement relief will be phased out over the next five years and indexation relief frozen from March this year. These are to be replaced by taper relief.

The taper relief rules

distinguish between business and non-business assets. The definition of business assets broadly follows that which applies for retirement relief, and shares in a trading company or group will be included as long as certain

criteria are met.

To qualify, an individual must hold at least 5% of the voting rights in a company and work full-time for it. Otherwise, 25% of the voting rights must be held.

After 10 years, a higher rate taxpayer who gets the maximum taper relief will only have to pay 10% in CGT when he or she sells a business asset, and 24% on other assets.

The amount of taper relief an individual is entitled to also depends on the number of years an asset is held for. Only full years of ownership after April 5 this year, count, and business assets need to be held for one whole year to qualify for taper relief, non-business assets for three. However, assets held on March 17, 1998, Budget Day, will get a bonus year of taper relief.

The main winners will be those who stand to realise large gains, especially if their assets have a low base cost, as they are unlikely to lose out from the end of indexation allowance. But over time their existing gain will reduce significantly as a result of taper relief.

Conversely, those who hold assets with a high base cost could lose out. Previously indexation could eliminate a gain over time. Under taper relief, however, some percentage of the gain is always going to be taxable.

Individuals who benefit from retirement relief face a similar situation. Those who expect to realise large gains when they

dispose of their business assets will benefit under the new rules.

People with more modest gains could lose out. For example, a taxpayer with gains of #250,000 pays no tax under retirement relief, and even after 10 years will pay #25,000 under taper relief. However, with gains of #1m, he or she will pay #150,000 under retirement relief and only #100,000 with the

maximum taper relief.

The main question during the transition phase will be whether to sell now or later. Several

factors need to be taken into account - the likely gain, the proposed date of sale, length of ownership, eligibility for retirement relief and whether the assets were owned before March 17 this year.

Retirement relief remains in full until April 5, 1999. It may therefore be wise for those

considering selling their business soon to bring forward the date if their tax liability is lower under retirement relief.

Alternatively, a disposal qualifying for retirement relief could be triggered by, for example, gifting shares into a trust.

One major disadvantage of taper relief will be for those planning to gift business assets and claim holdover relief on the resulting gain - this transfer will effectively reset the clock for taper relief purposes. Only the time the transferee has held the assets will be relevant.

q Patricia Ritchie is Partner in Charge of Tax for Deloitte & Touche in Scotland.