Capital gains tax is to be cut from 28% to 20% for higher rate taxpayers and from 18% to 10% for basic rate taxpayers with effect from 6 April 2016. However, gains made on buy-to -let properties and second homes will still be subject to CGT at 28% or 18%. Carried interest will also be taxed at 28%. These extra tax rates will make CGT even more complicated as any particular gain could be taxed at up to two out of four rates.
Entrepreneurs’ relief (ER) is to be expanded to long term investors who hold shares in unquoted trading companies. In a departure from the current conditions for ER, the investor won’t have to be an employee or officer of the company, or hold at least 5% of the share capital. The shares must be subscribed for on or after 17 March 2016 and held for a period of three years to the date of disposal, which cannot be before 6 April 2019. If these conditions are met the gain will be taxed at 10%, subject to a lifetime cap of £10 million on such gains. That cap will apply separately from the lifetime cap for other entrepreneurs’ relief gains.
In December 2014 the use of ER on the incorporation of business was restricted. The result was that ER can’t be claimed where business-related goodwill is passed to a company in which the seller or his associates hold any shares. The Government has decided to row-back slightly on that restriction, allowing ER to be claimed on the transfer of goodwill to a company, if the seller ends up with a minority share in the company of less than 5%. This change is back-dated to 3 December 2014.
Employee shareholder status
Since 1 September 2013 employees have been able to surrender a collection of employment rights in return for free shares in their employing company. These are known as employee shareholder status shares (ESS).
When an employee disposes of the ESS shares, no CGT was payable on the gain, where the initial value of the ESS shares was no more than £50,000. From 17 March 2016 the tax free gain on the disposal of ESS shares will be limited to £100,000 per person for life. This change will limit the use of ESS shares by entrepreneurs who want to lock-in a taxfree gain to shares held in their own companies.