In his Budget speech today the Chancellor continued a long standing tradition of tinkering with the taxation of capital gains. On this occasion it was rather more than tinkering and leaves the UK with a system of capital gains tax that aims to encourage investment in businesses.
The headline grabbing measure was a reduction in the rates of capital gains tax taking the maximum rate down from 28% to 20% and the lower rate from 18% to 10%. Those with buy to let properties and second homes need not get too excited however, as the measure will not apply to residential properties. The new rates will also be disapplied for gains on “carried interests” held by private equity executives.
In addition to this fundamental change the generous provisions of entrepreneurs’ relief (ER) were extended. Currently the 10% rate is only available to taxpayers who have for at least twelve months held a 5% holding in an unquoted trading company of which they are either an employee or director. The revised “investor” relief will simply require that the taxpayer subscribes for shares, rather than acquiring them from another shareholder, and holds them for at least three years. The rationale for this seems to be a desire to encourage investment into these companies. This is a separate £10m lifetime limit, meaning that individuals will be able to make gains of up to £20m (£10m as an employee and £10m as an investor) and benefit from the 10% rate.
To some degree this seems to cut across the Enterprise Investment Scheme (EIS) which has for many years been the main incentive for taxpayers looking to invest in smaller and riskier private companies. It is worth noting that “EIS” has been the subject of much anti-avoidance regulation over the years and is unpopular with our European colleagues. The introduction of this extension to “ER” might just be a prelude to the demise of that much maligned regime.
Employee shareholder status
Another development is of interest to those who are looking to incentivise their employees through the recently introduced Employee Shareholder Status. This scheme, sometimes know as “shares for rights” gave an opportunity for participants to enjoy an unlimited exemption from capital gains tax. The exemption has now been capped at £100,000 for awards made after 16 March 2016. The scheme, which was slow to gain acceptance but has become more popular in recent times, will now perhaps play a more conventional role in the employee share schemes market.