Capital Gains Tax (CGT) 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 18% or 28%. Also, receipts of carried interest by venture capital investors will continue to be taxed at 28%. This will add further complexity to the tax system as different assets will be subject to CGT at potentially four different tax rates.
The CGT rate for trusts and estates is also cut to 20% for most assets, other than residential property and carried interest, where it remains 28%.
The annual exemption for individuals and estates remains £11,100 for 2016/17 and that for most trusts remains £5,500.
Entrepreneurs' Relief (ER), which gives a 10% tax rate for qualifying disposals, is to be expanded to long-term investors in unquoted companies. In a departure from the current conditions for ER, the investor will not have to be an employee or officer of the company, or hold at least 5% of the share capital. As long as the investor subscribes for the shares after 16 March 2016, and holds them for at least three years from 6 April 2016, the gain on sale will be taxed at 10%. There will be a lifetime cap on these investor gains of £10 million, which will apply separately to the lifetime cap for other ER gains.
In December 2014 the use of ER on the incorporation of a business was restricted. ER cannot be claimed where business-related goodwill is passed to a company which is connected to the seller. The Government has now 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.
There are also technical changes to the ER rules for joint ventures and partnerships, relaxing some of the anti-avoidance rules introduced in 2015.
In a further change, ER will be able to be claimed on an 'associated disposal' of a privately-held asset when the accompanying disposal of business assets is to a family member. Relief can be claimed in some circumstances where the disposal of business assets does not meet the present 5% minimum requirement. This change is backdated to 18 March 2015.
Employee Shareholder Status (ESS)
From 1 September 2013, employees have been able to surrender a collection of employment rights in return for shares in their employing company. These are known as Employee Shareholder Status shares. When the employee sells the ESS shares he pays no Capital Gains Tax on any amount of gain, as long as the initial value of the ESS shares was no more than £50,000. From 17 March 2016, the tax-free gain on ESS 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 tax-free gain on shares held in their own companies.