Budget 2016 Changes to Capital Gains Tax

There are several surprising but also welcome taxation changes from The Budget 2016. The most significant change is a reduction in the headline rate of CGT – therefore, if you are considering the sale of an asset which will give rise to a chargeable gain, delaying the sale until after 5 April 2016 will not only defer the payment date of CGT but also result, in most circumstances, in a lower rate CGT applying.

The changes announced are detailed below:

• A reduction in the main rates of CGT for higher and basic rate taxpayers from 28% to 20%, and from 18% to 10% respectively. This applies to disposals from 6 April 2016, although chargeable gains on residential property or carried interest will continue to be taxed at the old rates of 18% and 28%.
• An extension of Entrepreneurs’ relief to long term external investors in unlisted trading companies. A lower 10% rate will apply to gains on shares subscribed for on or after 17 March 2016, and held for a minimum of three years from 6 April 2016. This new ‘investors’ relief’ will be subject to a lifetime cap of £10 million per person, and will extend to beneficiaries of trusts. This provides an alternative to the existing relief, which has a one year qualifying period, and requires the shareholder to both work for the company and own at least 5% of the equity.
• A relaxation of previously announced changes to the Entrepreneurs’ relief rules so that, in certain cases: •relief can be claimed for ‘associated disposals’ of privately-held assets with an accompanying disposal of business assets, to a family member
• Relief can be claimed on the transfer of goodwill of a business to a company controlled by five or fewer persons, or its Directors
• Relief can be claimed involving joint ventures and partnerships where the disposal does not meet the existing 5% minimum holding condition.

There had been speculation that CGT rates might be raised in the Budget following Government commitments not to raise income tax rates. It will be a relief to investors that this is not the case. However, it is disappointing that buy-to-let investors have been penalised again, as they cannot benefit from the reduced rates.

Some tightening of the capital gains rules were announced, including the introduction of a lifetime limit of £100,000 on exempt capital gains that can be realised on ‘Employee Shareholder Share’ arrangements entered into after budget day. Employee Shareholder Shares were introduced in 2013 as a way of rewarding employee shareholders in return for giving up certain employment rights.

The Government has also announced a review of the definition of a trading company for Entrepreneurs’ relief purposes to ensure it operates effectively.