April 6, 2016
The budget, delivered on 16 March 2016, has introduced a number of changes which will affect entrepreneurs and which are likely to impact upon their rate of tax on exit, the method by which transactions are undertaken in the future, and also on tax reliefs that might be available for investment into other trading companies. Some of the more relevant points are set out below:
TAX TREATMENT OF SHARE SALES AND LIQUIDATIONS
Whilst not strictly a budget change, in that this was announced in the Chancellor’s Autumn statement, the ability to claim Capital Gains Tax treatment, and relevant reliefs, is now limited in certain situations. What the Chancellor has done is introduce anti-avoidance provisions which are targeted at individuals seeking to turn income into capital. Principal targets are:
1. Liquidations of businesses where an individual remains involved in similar business activities through separate entities;
2. Companies which have accrued profits during a sale process to add to the sales consideration rather than distributing these as income; and
3. So-called money box companies, where individuals operating through a limited companies have accumulated profits without paying dividends with the expectation of then liquidating the company and claiming Capital Gains Tax treatment.
In all of these instances, there will be an element of the consideration received which will be subject to Income Tax and not Capital Gains Tax.
TAX DEDUCTIBILITY OF INTEREST PAYMENTS
The Government has announced that from 1 April 2017 there will be a limitation on the amount of interest which can be claimed by companies for tax purposes. It is expected that this will be limited to 30% of the profits and subject to an overall cap. This may be particularly pertinent to management buyout transactions where historically, a NewCo vehicle has been set up to act as the purchasing company which then takes on a combination of external and shareholder debt. At present, there is a limitation on the interest that can be claimed only by reference to transfer pricing rules.
CAPITAL GAINS TAX
The headline rate of Capital Gains Tax has now been reduced to 20% from 28%. This will apply to gains arising on assets other than residential property, except where Entrepreneurs’ Relief is available. This will significantly assist exiting shareholders in companies which may not satisfy the wholly or mainly trading criteria for Entrepreneurs’ Relief.
ENTREPRENEURS’ RELIEF
In the 2015 budget, some technical changes were announced to Entrepreneurs’ Relief which had the effect of restricting the ability to claim the relief where companies had interests in LLP or joint venture companies. The aim of the legislation was to prevent individuals with less than a 5% interest in the ultimate trading company benefiting from Entrepreneurs’ Relief, but the rules as introduced were far wider than this and impacted on a number of bona fide trading arrangements. We are pleased to see that these changes have been reversed with retrospective effect.
Additionally, rules have also been retrospectively amended in relation to the disposal of associated assets again to put the position back to where it should have been had originally legislation being drafted as intended. Associated disposals are disposals of assets used in the business which are connected with the sale of the shares or underlying business itself.
The Chancellor has announced that Entrepreneurs’ Relief will be extended to individuals who invest in unquoted trading companies with which they are unconnected after 17 March 2016. In such circumstances, they will no longer be required to be a director or employee arrangement but in order to benefit from the 10% rate of tax, the shares will need to be held for three years or more. This may assist companies to attract investment which do not now benefit from EIS qualifying status following rules introduced last year. Whilst this relief is by no means as generous as the EIS rules, this still recognises the fact that shareholdings in unlisted companies are inherently more volatile and this new reduced rate of tax is to be welcomed.
EMPLOYEE SHARE ARRANGEMENTS
There have been some changes to the employee shareholder share rules which are designed to cap the Capital Gains Tax free elements of any gains made on the disposal of such shares to £100,000. Any remaining shares will be subject to normal Capital Gains Tax rules.
Enterprise Management Incentive scheme arrangements remain attractive and there have been some minor changes to these to clarify the treatment of rights issues taken up by shareholders who have had acquired their shares under EMI arrangements.
PROPERTY TRADING AND DEVELOPMENT
Profits arising from the development of the UK property will now become subject to UK taxes regardless of whether the person undertaking the development is UK resident or not. This legislation is to counter a number of structures which have been introduced over many years to suppress the amount of profits which would otherwise be subject to UK Corporation Tax or Income Tax, taking advantage of the fact that non-residents are generally speaking subject to Capital Gains Tax only in relation to interest in residential property.
New rules are proposed to apply from the Report Stage of the passage of the Finance Bill through Parliament, but anti forestalling rules will take effect from Budget Day. This is intended to result in a UK resident person being in the same tax position as a non UK person undertaking the same activity in respect of UK property development.
SIMMONS GAINSFORD
6 APRIL 2016
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