Experts urge reform of reinvestment relief on CGT

A string of harsh restrictions are hampering the use of reinvestment relief on capital gains tax, experts claim.

The relief allows individuals to defer tax payment on a chargeable gain by reinvesting it in shares of a qualifying company. But chartered accountant Chantrey Vellacott has pressed the Chancellor to reform relief terms to boost the attraction of investing in smaller companies. Its Budget submission lists six changes it believes will reinvigorate the relief, first introduced in the 1993 Finance Act. Proposed reforms include:

reducing required holding company ownership of subsidiaries from 75% to just over 50%;

ending the exclusion of sub-subsidiaries and some non-resident and non-qualifying subsidiaries;

including companies which hold shares for employee schemes;

allowing businesses with trade investments.

Chantrey Vellacott senior tax consultant Maurice Fitzpatrick said: ‘In order to make the relief work as it was surely intended, these restrictions should be abolished.’

Merchant bank Singer & Friedlander argued that potential investors are being scared off by uncertainty over whether a small company qualifies for the relief. S&F warned that half the young companies expected to qualify, actually do not.

David Pool, director of S&F, said: ‘Relief is granted by local tax inspectors on an individual basis.

‘Consequently, different tax inspectors have been known to give rulings on the same company, within the same time period.

‘The Inland Revenue is unable to inform individual companies at any particular time, whether their shares are potentially eligible for reinvestment relief,’ he said. ‘This means that a company is not able to inform potential investors of their qualification status in the annual report.’