TAX NEWS - 2010

UK Tax: The new entrepreneurs' relief, the 28% capital gains tax rate, and other matters of interest to entrepreneurs and families in business: The Emergency Budget 2010 and Finance Bill 2010

This emergency Budget… supports a strong enterprise-led recovery" (George Osborne, 22 June)   

We had been braced for austerity, pain and tax as the Chancellor attempted to whittle down the country's debt, allay the concerns of credit rating agencies and placate the bond market.

But while the headlines focused on tax increases and in particular on the increase in VAT to 20% next January, the Emergency Budget and Finance Bill (No. 2) 2010 introduced a number of changes that may be welcomed by entrepreneurs and family-owned businesses.

Adam Carvalho (Solicitor) and Nick Dunnell (Partner) from the Private Client team examine a number of these changes:

- The Government has extended Entrepreneurs' Relief ("ER") to the first £5 million of gains. This has significantly increased the maximum relief available from £80,000 to £900,000, and possibly more (with appropriate planning).
- A new higher rate (28%) of capital gains tax has been introduced.
- Other measures introduced to encourage corporate growth include a fall in Corporation Tax over the next four years (to 24% by 2014-15), Research and Development Relief from corporation tax becoming easier to claim, changes to the EIS, VCT and Enterprise Management Incentives rules, and a three year National Insurance holiday for areas outside London, the South East and the Eastern Region.

We hope that you enjoy this Budget update. If you have any questions, please contact your usual contact at the firm.



Capital Gains Tax

CGT Rates for Individuals

The Liberal Democrats had wanted to bring CGT rates on non-business assets closer to income tax rates to remove the incentive for individuals to convert income to capital gains, but a compromise between Liberal Democrat sentiment and Conservative instincts appears to have been reached.

There will now be three rates of tax for individuals:

- A new 10% rate (see Entrepreneurs' Relief).
- Where an individual's total taxable income and gains (after allowable deductions) do not exceed the income tax basic rate band (£37,400 in 2010/11) CGT will remain at 18%.
- Where an individual is a higher rate tax payer, or to the extent that his gains in a tax year take him over the basic rate, he will pay a 28% CGT rate.

The annual exemption for individuals and personal representatives will remain at £10,100 for 2010/11 (despite Liberal Democrat pressure to reduce it).


CGT Rates for Trusts and Trustees

Trustees and personal representatives will pay:

1. 10% tax to the extent that ER applies.
2. Otherwise, 28% CGT regardless of whether the person who created the trust was a higher or lower rate tax payer.

The annual exemption for trustees remains at £5,050.


Immediate Effect

Provided that the Finance Bill as it stands receives Royal Assent, the rate change will already have been in effect from 23 June 2010. Broadly, gains realised before 23 June 2010 will be taxed at the old rate, while gains realised on or after that date will be taxed at the new rates. Any applicable losses or annual exemption can be set against the gains in the manner that is most beneficial to the taxpayer.


Entrepreneurs' Relief

"I am acutely aware of how important it is to protect the incentives to succeed in business and to innovate" (George Osborne, 22 June)

The Government was of course alive to the fact that higher CGT rates could deter enterprise and attempted to address the issue by making ER significantly more beneficial to entrepreneurs disposing of business assets.


Potential Saving of £900,000

ER was introduced in 2008 essentially as a sop following the removal of business asset taper relief. Initially, the relief meant that entrepreneurs were charged tax at an effective rate of 10% rather than 18% (i.e. 8% less) on gains up to £1 million (or, briefly, £2 million from 6 April 2010 to 22 June 2010), resulting in a modest tax saving of up to £80,000 (or, briefly, £160,000).

Now that the top rate of CGT has risen to 28%, ER provides a rate which is 18% lower than the usual rate of tax on gains up to £5 million. Entrepreneurs could therefore save up to £900,000. Moreover, there may be scope to increase the tax savings if more than one member of a family is involved in the business.


ER – claiming the relief

Broadly, an individual can currently claim ER on the sale of shares in a private trading company (or holding company of a trading group) if the individual:

- was an officer or employee of the company (or a company in the same group) for at least a year before the sale (or other disposal); and
- holds at least 5% of the ordinary shares (allowing him at least 5% of the voting rights).

The tax relief also applies to the sale of interests in unincorporated businesses and to sales of assets used in a business (but owned by one of the shareholders or partners).


Comment

There had been some speculation (and lobbying from organisations such as the British Venture Capital Association) that the Government might introduce a form of taper relief or indexation. ER is less extensive and less generous than the old business assets taper relief but the changes have significantly raised the maximum saving (to £900,000). There may be scope for further savings by careful planning, for instance by involving other members of the entrepreneur's family or by use of trusts, but it is essential to take advice first, and the earlier the better.


Trusts

UK CGT rate for trusts is now 28%. However, ER is available to the trustees of onshore trusts provided that the conditions outlined above are met and, in addition, that the principal beneficiary of the trust is an officer or employee of the company or is a partner in the partnership.

Because of the changes to the mechanics of ER, it would appear that ER does not apply to offshore trusts. In circumstances where offshore trusts contain assets upon which they might claim ER, it may be advantageous for the trustees to come onshore before realising the gain. However, this would depend on the facts of the case. Before considering such a measure it is essential to seek timely advice.


Other measures

"I want a sign to go up over the British economy that says: 'Open for Business'" (George Osborne, 22 June)

As a means of encouraging further corporate growth, the main rate of Corporation Tax applied to taxable profits above £1.5 million will be reduced from 28% to 27% from 1 April 2011, with further reductions to 24% by 2014-15. The small profits rate (paid by companies making profits of up to £300,000) will fall to 20% from 1 April 2011.

From April 2012 capital allowances will be less generous and the Annual Investment Allowance (which broadly allows businesses to claim the cost of qualifying plant and machinery – excluding cars – as a deduction from their profits) will also fall in April 2012 from £100,000 to £25,000.

The rules on Research and Development tax relief from Corporation Tax for small and medium sized enterprises (enterprises with less than 500 employees, and an annual turnover under €100m or balance sheet total under €86m) will be amended so that the relief can be claimed even where the company claiming relief does not own the intellectual property created as a result of the R&D expenditure.

Various changes will be made to the Enterprise Investment Scheme and Venture Capital Scheme which should widen the scope of share ownership by allowing shares in VCTs to be listed anywhere in the EU (not simply the UK) and permitting participating companies to trade anywhere provided that they have a "permanent establishment" in the UK (which might, for instance, be a factory or branch). Similarly, companies granting Enterprise Management Incentives options to employees may trade anywhere in the world provided they have a permanent establishment in the UK.

A National Insurance holiday is due to start in September and to last for three years, under which new businesses outside London, the South East and the Eastern Region may apply for exemption from up to £5,000 of employers' Class 1 NIC's due in the first year of employment for each of their first 10 employees hired (representing a saving of up to £50,000).

Finally, from 1 October 2012, employers will have a duty to auto-enroll workers into a qualifying pension arrangement and start contributing to the chosen scheme. By October 2017, there will be a minimum contribution of 8% of qualifying earnings of which the employer must pay a minimum of 3%, in which case the worker will pay 4%, and a further 1% paid as tax relief by the government. This minimum contribution level will be phased in between October 2012 and October 2017, with the largest employers being affected first.