Further tightening of entrepreneurs’ relief rules
Entrepreneurs’ relief applies a reduced capital gains tax rate of 10% to capital gains on certain eligible business assets, subject to a lifetime limit of £10m of gains. The main rate of capital gains tax is now 28% and therefore Entrepreneurs’ relief can be extremely valuable to individuals disposing of qualifying business assets.
The December 2014 Autumn Statement included the unexpected announcement that the disposal of goodwill to a close company related to the vendor would no longer qualify for entrepreneurs’ relief. This has impacted on the structuring of incorporations taking place since 4 December 2014.
The Chancellor has announced another two measures, effective immediately, that will further restrict the availability of entrepreneurs’ relief on disposals of business assets in certain cases, increasing the tax payable on such disposals from 10% to the main rate of 28%.
Associated disposals must accompany a ‘significant’ withdrawal from a business
The first measure tightens the rules on claims to entrepreneurs’ relief in respect of disposals of assets, held personally by an individual, but used in the trade of their partnership or company. Subject to certain conditions, it is possible to claim the 10% entrepreneurs’ relief rate of tax on such disposals, where they are associated with a full or partial withdrawal from the business itself. Withdrawal from the business was not previously defined, leaving open the possibility of a claim to entrepreneurs’ relief on asset disposals at the same time as a very small reduction to an individual’s shareholding or partnership share.
To ensure that entrepreneurs’ relief is only available where an individual has genuinely withdrawn from a business, it is now only available on disposals of personally held assets where they accompany a disposal of at least a 5% shareholding in a company or at least a 5% share in the assets of a partnership.
Clampdown on corporate partners
The second measure aims to restrict entrepreneurs’ relief to those with a genuine stake in a trading business and prevents claims to the relief in respect of gains on shares in certain companies which invest in joint venture companies, or which are members of partnerships. Shares in normal trading companies, including corporate partners which carry out a trade in their own right (e.g. a service to the partnership), should not be affected. However if the only activity that a company undertakes is being a member of a partnership then a disposal of shares in the company will no longer be eligible for entrepreneurs’ relief.
Reduction to pensions lifetime allowance
The Chancellor announced that the lifetime allowance for pension contributions will reduce from £1.25 million to £1 million from 6 April 2016. There will be transitional rules to protect those with pension funds already in excess of the new lower limit and he did further soften the blow by announcing that from 6 April 2018 the lifetime allowance will be increased annually in line with the consumer prices index.
Where an individual’s pension savings exceed the lifetime allowance the excess is subject to additional tax when it is withdrawn from the pension - 55% if it is taken as a lump sum and 25% if it is taken as regular income (e.g. an annuity). This is on top of any tax payable on the income in the usual way.
Annual Investment Allowance – a case of wait and see
At present, the Annual Investment Allowance (AIA) is set to reduce from £500,000 to £25,000 per annum from 1 January 2016. The AIA provides 100% tax relief in the year of purchase on qualifying capital expenditure, which includes plant and machinery, certain fixtures and fittings and commercial vehicles, up to the annual limit.
Where a business spends more than the annual limit on qualifying items, tax relief is still available but at a lower rate of either 8% or 18% per annum, dependent on the type of expenditure.
In his speech the Chancellor commented that a reduction to £25,000 would be unacceptable but deferred making a decision on what the limit should be until the next Autumn Statement.
This leaves things rather up in the air for businesses intending to make significant capital expenditure in the next 12 months.
The AIA is pro-rated for accounting periods ending after 31 December 2015 and therefore some businesses may already be in, or will be shortly entering, an accounting period where the available AIA is potentially less than £500,000.
If you are planning any significant capital expenditure or property renovations and think that you might be affected by this, please get in touch with me or one of the team for further advice.
The Budget – other announcements
Other announcements on the day included the introduction of a personal savings allowance and a reduction to tax charges on the sale of pensions annuities. An analysis of these points and more can be found by clicking here