On first reflection, the reduction in capital gains tax (CGT) rates announced in the Budget may have seemed a radical surprise from the chancellor. Not being one of the triple-locked taxes it was quite probable that he could have increased the tax, but instead he chose to reduce it. He also extended, rather than reduced, the amount of entrepreneurs’ relief (ER) for a different group of investors than the current beneficiaries of ER. Individuals may now have £20m of ER available to them, rather than £10m. All very good news – but it needs a closer look.
Reduced rate of CGT
So, from 6 April 2016, higher-rate taxpayers will pay CGT at 20 per cent, rather than 28 per cent, and basic-rate taxpayers will pay CGT at 10 per cent, rather than 18 per cent. Importantly, though, two groups of individuals will not be able to benefit from these reduced CGT rates:
- buy-to-let and second-home owners, who have already been hit with a combination of higher stamp duty land tax, interest restrictions and changes to wear-and-tear allowance; and
- those in the private equity industry, who have also been hard hit on how their carried interest gains are calculated and the shift of some of these gains into income tax.
So what transactions might benefit from these lower rates of CGT?
Sales of shares held in portfolios and similar longer-term investment returns, shares in private companies which do not qualify for entrepreneurs’ relief under the existing or new rules or exemption under enterprise investment schemes (EIS and SEIS), chattels (antiques, artwork, etc) and commercial property. It is likely, therefore, that the tax giveaway is relatively small – Treasury figures suggest a reduction in CGT take of just over 10 per cent from the current £5.5bn this tax contributes to government.
Entrepreneurs’ relief for long-term investors
A new relief was announced, giving a 10 per cent tax rate for the sale of certain shares and a separate £10m limit, in addition to the current £10m lifetime allowance for the existing ER. The new rules will require:
- shares to be subscribed for;
- in a private trading company; and
- held for three years.
Many investors in this situation would qualify for the EIS relief which gives both a 30 per cent income tax reduction on the amount invested and complete exemption for capital gains tax. So this further relief is only for those who may not qualify, perhaps because of their holding in the company is significant, they have a close connection to the company or the company is too large to qualify for EIS. Also, crucially, it doesn’t allow employees to benefit from this new ER where they don’t already qualify under regular ER (perhaps because they don’t have the required 5 per cent shareholding).
Again, HM Treasury figures suggest that this relief will only see around £40m reduction in the £5.5bn of CGT tax take.
So, now that the fanfare has died down and the cold light of day has dawned, we can see that this may be a headline-grabbing reduction in tax rates but the reality is that it will benefit only a small group of people, unless behaviours change so that investors make a major shift to seek out the new relief and rates of CGT.
For more information please contact Gary Heynes, or your usual RSM contact.