The below article appeared in The Scotsman on Monday 21st March 2016.
Chancellor cuts rates and extends entrepreneurs’ relief in Budget, writes Anne Marie Renz
There were a number of eye-catching announcements in the Chancellor’s Budget. The introduction of a Lifetime Isa to help under-40s save for their first home and provide for retirement was interesting and the proposed sugar levy stole many headlines.
Among the other announcements were various changes to the capital gains tax (CGT) regime which will reduce key tax rates and extend the availability of entrepreneurs’ relief.
CGT is currently 28 per cent, or at the lower rate of 18 per cent to the extent that the gain falls within a taxpayer’s basic rate band. From 6th April 2016, both rates will reduce by 8 percentage points. Gains on stocks and shares, artwork and commercial property will all benefit.
However, the government again singled out residential property for less favourable tax treatment.
From April, such gains will attract an 8 per cent supplementary rate, which effectively means buy-to-let investors and second home owners will pay the same amount of CGT as under the current rules.
Main residences will continue to be exempt so rate changes will not affect people moving home.
Gains relating to carried interests in investment funds will also attract the new supplementary rate.
Gains which qualify for entrepreneurs’ relief – mainly the sale of certain types of business assets – attract a CGT rate of 10 per cent. There will be no reduction in this rate after 6th April 2016.
Rules around entrepreneurs’ relief were tightened in a number of areas in the Autumn Statement 2014 and March 2015 Budget. This was intended to combat perceived abuse in the operation of the relief but had the unintended effect of denying relief in some genuine commercial situations. After lobbying by professional bodies, the rules have been relaxed somewhat with the revisions backdated to the time the original restrictions were introduced. The relaxations are in three main areas:
- Associated disposals: Relief is available where a taxpayer sells shares or a business interest and, in association with that disposal, they also sell a privately owned asset which is used in the business. The former rules had the unintended effect of denying relief where the shares or business interest was sold or gifted to a family member and the changes made in the Budget corrects this situation.
- Goodwill: Restrictions introduced last year prevented an individual from qualifying for relief on the gain arising from the sale of goodwill to a close company in which they, or a member of their family, owned shares – no matter how small the shareholding. Under the new rules, such individuals will qualify for relief provided their shareholding is less than 5 per cent of the acquiring company’s shares.
- Joint ventures and partnerships: In determining whether a company is a “trading company” for the purpose of the relief, the old rules treated any interests the company owned JVs or partnerships as investments. Subject to certain other conditions being satisfied, the revised rules allow a company to take into account a proportion of the JV or partnership’s underlying trading activities in establishing whether or not the company itself qualifies as a “trading company”.
In a move designed to help companies attract new capital investment, the Chancellor announced a significant extension of entrepreneurs’ relief to long-term investors in unlisted trading companies. This new version of the relief will apply where an investor subscribes for new ordinary share capital on or after 17th March 2016 and holds the shares for a minimum of three years from 6th April 2016.
There is no minimum shareholding requirement and the investor does not have to be an officer or employee of the company to qualify for relief. The gains that can qualify for this new relief will be subject to a lifetime limit of £10 million.
Employee shareholder status was introduced in 2013. The rules allow employees to give up certain employment rights in return for at least £2,000 of shares in their employing company. These shares are free of income tax and national insurance when acquired and, when sold, are fully exempt from CGT. However, as a result of budget changes, gains on shares acquired under an employee shareholder agreement made on or after 17th March 2016 will only be exempt up to a maximum lifetime limit of £100,000.
Gains in excess of this this sum will be chargeable to CGT in the usual way.