CGT taper relief – what is a “trading company”?

The June 2001 issue of the Inland Revenue Tax Bulletin contains a discussion of the meaning of the expression “trading company” as used in the legislation for CGT tapering relief. The question, of whether or not a particular company is a “trading company” will be vital for deciding whether or not a gain will enjoy the now very favourable tapering regime applicable to business assets. This does not just relate to gains arising from a disposal of the shares in the company. It may also be relevant for assets used by the company – at any rate where the company concerned is an unquoted company.

The greatest problems have been caused by the very restrictive terms in which Paragraph Tax 22 of Schedule A1 TCGA 1992 is drawn. In order to qualify the company must “exist wholly for the purposes of carrying on a trade” (or of course several trades, or professions, or vocations). The only let out is that non-trading purposes are ignored if they are “capable of having no substantial effect on the extent of the company’s activities”. The use of words like “ wholly for the purpose” and “capable of having no substantial effect” seem to leave little room for negotiation.