The Chancellor announced a number of changes to Capital Gains tax (CGT) and Entrepreneurs' Relief (ER) in his 2016 Budget statement, including a reduction in capital gains tax rates for individuals.
CGT rates
The rate of CGT for individuals is reduced for disposals on or after 6 April 2016 to:
- 10% (18% 2015/16) for basic rate taxpayers
- 20% (28% 2015/16) for higher rate taxpayers
- 20% (28% 2015/16) for trustees and personal representatives
Exclusions:
- Gains relating to residential property disposals which are not covered by private residence relief (e.g. buy-to lets) will continue to be charged at 18% and 28%.
- Carried interest gains will continue to be charged at 18% and 28%.
There is no changes to the rate of CGT paid by companies; ATED related gains will continue to be charged at 28% and non-resident CGT will be taxed at 20%.
See CGT 2016: New Rates and Residential Property Gains.
CGT and Employee shareholder status shares
- Exempt gains made on qualifying Employee shareholder shares will be subject to a lifetime limit of £100,000.
- This will only apply to gains on shares issued in consideration of an Employee Shareholder Agreement entered into on or after 17 March 2016.
Entrepreneurs' Relief (ER)
The reduction in the CGT rate for basic rate taxpayers to 10% is an interesting development in that it waters down ER. Basic rate taxpayers, such as employee shareholders will from 6 April 2016 be indifferent as to whether their gains attract any relief.
There are to be four changes to the relief, the last three are back-dated:
- Long term investors' relief
- Goodwill on incorporation
- Associated disposals
- Joint venture companies
Long term investors' relief
ER is extended to individual company investors who are not officers or employees of the company, subject to a lifetime cap of £10 million.
Shares must be:
- Newly issued on subscription for new consideration on or after 17 March 2016
- In an unlisted trading company or unlisted holding company of a trading group
- Held continuously for three years before disposal
Goodwill on incorporation
- The ER legislation is amended to ensure that ER can be claimed on gains on the disposal of goodwill in a business on sale to a close company provided that the claimant holds less than 5% of the shares and voting power in the company.
- Relief will also be due where the claimant holds 5% or more of the shares or voting power if the transfer of the business to the company is part of arrangements for the company to be sold to a new, independent owner.
- This measure will be backdated to apply to disposals made on or after 3 December 2014.
Associated disposals
- ER will be available on an associated disposal of a privately held asset on the sale or transfer the accompanying business or shares to a family member.
- It will not be necessary to meet the minimum 5% withdrawal from the business if the individual is selling the whole of his remaining interest having previously held a larger stake.
- This is to prevent the anti-avoidance legislation introduced in Finance Act 2015 from applying to transactions involving normal succession arrangements.
- Where applicable, the relief will apply to associated disposals on or after 18 March 2015.
- Where assets that are acquired on or after 13 June 2016 are disposed, to qualify for ER as an associated disposal the asset must have been held for 3 years.
Joint venture companies definitions
- New definitions for "trading company" and "trading group" will be introduced for ER purposes so that a company that holds shares in a joint venture company will be treated as carrying on a proportion of the activities of that company.
- An individual holding the company shares must hold at least a 5% interest, directly or indirectly, in the Joint Venture company.
- A similar change will be made for companies holding an interest in a trading partnership or LLP.
- Where applicable, the changes will be effective for disposals on or after 18 March 2015.
