Capital gains tax rates
The rates of capital gains tax (CGT) are changing for disposals of relevant assets made on or after 6 April 2016.
• the 18% rate of CGT, which applies to individuals who are not higher rate taxpayers, will be reduced to 10%
• the 28% rate of CGT will reduce to 20%
• disposals of residential property that do not qualify for private residence relief and the receipt of carried interest will continue to be taxed at the 18% and 28% rates of CGT
• provisions will be introduced to enable a taxpayer to use any unused income tax basic rate band in the most beneficial way.
Entrepreneurs' relief: extension to long term investors.
Entrepreneurs' relief will be extended to external investors in unlisted trading companies. This new relief will apply a 10% rate of CGT to gains accruing on ordinary shares in an unlisted trading company held by individuals that were newly issued to the claimant and acquired for new consideration on or after 17 March 2016, and have been held for at least 3 years from 6 April 2016.
There will be a lifetime cap for investors of £10,000,000.
Entrepreneurs' relief on associated disposals
Finance Act 2015 introduced new rules to combat abuse of entrepreneurs' relief but they had unintended consequences which prevented entrepreneurs' relief being available on associated disposals when a business was being sold to a member of the family as part of the succession planning for the business.
Legislation will be introduced in Finance Bill 2016 to amend the definitions of ‘partnership purchase arrangements' and ‘share purchase arrangements' for entrepreneurs' relief purposes by excluding the material disposal itself and arrangements which predated both the material disposal and an associated disposal and are independent of the material disposal.
The legislation will be backdated and will apply to associated disposals made on or after 18 March 2015.
The requirement that the material disposal of business assets is 5% or more of the claimant's share in the company or partnership does not apply where the claimant disposes of the whole of the interest and has previously held a larger stake.
Employee shareholder status exemption
Employee shareholder shares issued as consideration for entering into employee shareholder agreements after midnight on 16 March 2016 will be subject to a lifetime limit of £100,000 exempt gains for the purposes of CGT.
Gains in excess of the limit will be subject to CGT at the prevailing rate. Any employee shareholder shares that were issued before midnight on 16 March 2016 will not be subject to any lifetime limit when sold.
If any employee shareholder shares are transferred to a civil partner or spouse, the transfer will be treated as being made for a consideration which gives rise to a gain equal to the transferor's unused lifetime limit, provided that the consideration does not exceed the market value of the shares transferred. This will fix the acquisition cost of the person acquiring the shares.
Joint ventures and partnerships
Finance Act 2015 introduced new rules to combat abuse of ER. Unfortunately, these new rules also prevented ER relief being available for some genuine commercial structures where tax avoidance was not a primary motive.
New definitions of ‘trading company' and ‘trading group' will be introduced in Finance Bill 2016 for ER purposes so that in a joint venture, a shareholder in the joint venture will be treated as carrying on a proportion of the activities of the joint venture corresponding to its percentage shareholding in the joint venture.
The new rules will be backdated and will be effective for disposals made on or after 18 March 2015.
The new definitions will apply for the purposes of a disposal of shares in the joint venture if the person making the disposal has at least a 5% interest in the shares of the joint venture company and controls at least 5% of the voting rights. The interest and voting rights may be held directly or indirectly by the claimant.
Where a partnership with a corporate partner exists, the new definitions will apply if the person making the disposal is entitled to at least 5% of the partnership's assets and profits, and controls at least 5% of the voting rights in the corporate partner. A person who holds 20% of a company which itself holds 40% of a trading company's shares will be treated as holding 8% of the trading company's shares.
Inheritance tax measures
The government will legislate to ensure that the residence nil-rate band will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 where assets are passed on death to direct descendants.
Legislation will be introduced to ensure that a charge to IHT will not arise when a pension scheme member designates funds for drawdown but does not draw all the funds before death. This will be backdated to apply to deaths on or after 6 April 2011.
We can advise on how these changes may affect you.