The most significant change to capital taxes is the reduction in the lifetime limit for Entrepreneurs' Relief from £10 million to £1 million. This is effective from the date of the Budget, while anti-avoidance rules may also catch some earlier transactions. Despite speculation, no changes have been made to the inheritance tax regime.
Entrepreneurs' Relief (ER) lifetime limit reduced to £1 million
The ER lifetime limit is the overall amount of qualifying capital gains on which an individual can claim ER during their lifetime. The limit, previously £10 million, has been reduced drastically from 11 March 2020 to £1 million.
ER is a valuable relief reducing the capital gains tax (CGT) rate from 20% to 10% on qualifying disposals, commonly unlisted shares in a trading company for which the shareholder was an employee or director.
The reduction of the lifetime limit means that only the first £1 million of gains realised on qualifying disposals during an individual’s lifetime will qualify for the reduced rate of CGT.
The reduction to the lifetime limit will affect qualifying disposals made on or after 11 March 2020. Anti-avoidance rules will accompany the changes, however, and these rules aim to counteract attempts to plan in advance of the changes and will apply broadly in two scenarios:
- contracts entered into before the Budget in order to ‘bank’ ER, which have not yet completed. This is unless it can be shown that the contract was not entered into to exploit the rules governing the timing of a disposal and, where the parties to the contract were connected, that the contract was entered into for wholly commercial reasons; and
- company reorganisations involving a share for share exchange between 6 April 2019 and 11 March 2020, where specific conditions are met and an election is made for Entrepreneurs’ Relief to apply on the reorganisation.
It was widely expected in the run-up to the Budget that a significant change would be made to ER. This was amid concerns and growing pressure from within and outside the Government, calling for the relief to be abolished entirely.
In this context, the continuing commitment to maintaining the relief and the acknowledgement of its value in supporting the role that entrepreneurs play in the economy is heartening.
The substantial reduction to the lifetime limit, however, significantly limits its benefit to taxpayers. The fact that the ER claimed in respect of previous qualifying gains must be taken into account means that many individuals will now find they are no longer entitled to claim the relief.
It is recommended that a review is carried out of any transactions entered into prior to the Budget, to consider whether the anti-forestalling rules could apply.
When will it apply?
It will apply to disposals from 11 March 2020, with possible wider application to some disposals prior to this date.
Capital gains tax allowance increases to £12,300
The capital gains tax annual exempt amount will increase from £12,000 to £12,300 for individuals and from £6,000 to £6,150 for trustees. This will take effect from 6 April 2020. This increase is in line with inflation, which is current Government policy.
When will it apply?
From 6 April 2020
Other capital taxes measures due to come in
Significant changes to capital gains tax on residential property disposals were proposed in the 2018 Budget, along with changes to filing and payment deadlines. Following consultation, they will be introduced from 6 April 2020. A few other measures are also due to be enacted.
Changes on disposal of residential property that are due to take effect from 6 April 2020 include:
- changes to private residence relief - the final period exemption will be reduced from 18 months to 9 months and lettings relief will only apply where a landlord shares a property with a tenant (draft legislation published);
- the deadline for paying the tax and reporting the disposal of a residential property can be 30 days from completion, broadly where tax is payable (this is already legislated).
A previously announced clarification to the rules on excluded property trusts will be enacted in this Finance Bill. This clarifies the position on additions to trusts and transfers between trusts.
CGT relief on loans to traders that subsequently become irrecoverable was extended to cases where the borrower is resident overseas from 24 January 2019. The legislation will be enacted in this Finance Bill.
When will it apply?
CGT property changes apply to sales where exchange of contracts takes place on or after 6 April 2020.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.