Out-Law News 2 min. read
17 Mar 2016, 11:39 am
The rate reductions will apply to all chargeable gains accruing from 6 April 2016, other than those arising on the sale of residential property and to carried interest gains. Carried interest is the share of the profits realised from a fund's investments that is paid to executives of a private equity fund.
The 28% and 18% rates are retained for residential property that does not qualify for private residence relief to "provide an incentive for individuals to invest in companies over property" HMRC stated in a policy paper.
Tax expert Christine Yuill of Pinsent Masons, the law firm behind Out-Law.com, said: "The fact that the reduction will not apply in relation to gains from the sale of residential property, together with the increased rates in SDLT and LBTT for multiple home owners, underlines how strongly the Government wishes people to move away from investment in second homes and buy-to let properties".
"This significant reduction in CGT rates is likely to result in an increase in individuals, so far as possible, seeking to arrange their tax affairs in order to receive as much as possible in the form of capital gains rather than income. We expect that there is likely to be a notable increase in employers seeking to incentivise employees using tax-favoured share plans as there was in 2008 following the reduction in the top rate of CGT at that time from 40% to 18%," she said.
Changes were also announced to entrepreneurs' relief (ER) from capital gains tax which reduces the rate of CGT to 10%. Previously a relief applying only to business owners, ER is now being extended to long-term investors in unlisted trading companies.
ER is currently only available to individuals who have worked for and owned at least 5% of the ordinary shares in a company for at least a year before their shares are sold. Subject to a lifetime cap of £10 million, ER will be extended to external investors, provided that certain conditions are met, including that the shares are newly issued in an unlisted trading company, or an unlisted holding company of a trading group, on or after 17 March 2016 and are held for a continuous period of at least three years from 6 April 2016 before their disposal.
"The overall reduction in the rates of CGT may have lessened the importance of entrepreneurs' relief for many, however, at half of the top rate of CGT it remains a valuable relief and the extension to external investors will be welcomed, particularly by smaller companies seeking to attract new capital," Yuill said.
ESS agreements enable employees to be given shares in the employer company worth between £2,000 and £50,000 in exchange for giving up certain employment rights. Any profit made when those shares are sold is exempt from CGT.
"Since its introduction, it has been recognised that ESS provides very generous tax reliefs and that the Government was keen to avoid the reliefs being abused. It was, therefore, anticipated that some form of restriction would eventually be imposed by the Government," said Christine Yuill.
"A lifetime limit of £100,000 ought to ensure that those who the status was initially introduced to benefit continue to do so, and that ESS can continue to be used as an extremely useful incentive and employee retention tool," she said.