George Osborne has continued his support for UK business owners in his March 2016 Budget by maintaining the current Entrepreneurs’ Relief and introducing new tax-saving measures.
Entrepreneurs’ Relief allows those people selling a business to pay capital gains tax on their gains at a reduced rate. Instead of paying capital gains tax at the prevailing rate, these business owners pay just 10 per cent on profits on disposals subject to a lifetime limit of £10 million.
Speculation had been mounting that the Chancellor was considering abandoning the relief after analysis showed that the cost to the exchequer in 2013/14 was £2.9 billion, £2 billion more than was originally forecast. Moreover, 60 per cent of the total relief (£1.8 billion) was claimed by only around 3,000 individuals.
However, after no doubt concluding that the relief is an attractive incentive for people to start up and grow companies, the Chancellor is not only continuing the relief, but also extending it to investors looking to buy shares in unlisted companies. Under the new rules, in effect from 6 April 2016, entrepreneurs are able to access the preferential 10 per cent rate of capital gains tax rate on newly issued shares from unlisted companies. However, the new rules only apply to shares purchased from 17 March 2016 onwards, and they must be held for a minimum of three years from 6 April 2016 to qualify.
The reformed entrepreneurs’ tax relief will also enable the disposal of privately-held business assets to family members. There will be more relief for partnerships and joint ventures wherever the existing five per cent minimum holding conditions are not satisfied.
However, with the introduction of lower capital gains tax rates from April 6th 2016, the relative advantage of Entrepreneurs’ Relief has been effectively reduced. The higher rate of capital gains tax is to be cut from 28 per cent to 20 per cent, while the basic rate of capital gains tax is being dropped from 18 per cent to 10 per cent. Nevertheless, Entrepreneurs’ Relief will still enable higher rate taxpayers to reduce the tax on their disposals by up to 50 per cent.
Entrepreneurs’ Relief Example
Mark James ran Acme Engineering Co. Ltd for over 15 years, eventually selling it on 6th April 2016 as a going concern, realising a gain of £12 million.
Mark had never before claimed any Entrepreneurs’ Relief.
The gain on the sale qualifies for relief as a disposal of whole or part of a company and Mark duly makes a claim within the allowed time limit.
Mark has the maximum relief of his lifetime allowance of £10 million available to him, so on that part of his gain he is taxed at just 10 per cent.
The balance of the capital gain of £2 million will be charged at Mark’s relevant rate of capital gains tax (CGT). As Mark is a higher rate tax payer, if he had sold the business before 6th April 2016, he would have incurred CGT at 28 per cent on the last £2 million of his gain, i.e. £560,000. However as the CGT rate has dropped from 28 per cent to 20 per cent for higher rate taxpayers from April, Mark will now only need to pay £400,000 on this portion of the gain.
Mark’s total tax obligation on the sale of his business is therefore £1,000,000 + £400,000 = £1,400,000.
The Treasury has said that the extension of Entrepreneurs’ Relief will be revenue neutral in 2016-17. However, it expects to bring in around £5 million in 2017-18. After that, however, the exchequer will lose £25 million, £40 million and £60 million in the subsequent financial years.
Osborne said in his announcement, “This Budget continues to lower taxes, with new support for small business and entrepreneurs, while also modernising the tax system and taking steps to ensure that taxes are fair and are paid.”
Among other welcome reforms for smaller companies was an overhaul of the business rates system. Mr Osborne announced that the threshold for small business rate relief has been more than doubled from £6,000 to £15,000, with the higher business rate also shifted from £18,000 to £51,000. The Chancellor was keen to highlight that the reforms will mean an estimated 600,000 small and medium-sized firms in the UK will pay no business rates at all.
These changes have been welcomed by business lobbyists, who had been campaigning for reforms to business rates before the Chancellor unveiled his latest Budget. The Guardian reported that lobbyists are claiming victory with the creation of a business rates roadmap to create “a level playing field for businesses”.
For larger businesses, the Budget also showcased a few welcome changes for the future, with the news that corporation tax rates will be cut to 17 per cent by April 2020.
Commercial stamp duty was also adjusted in the Budget, with the changes becoming effective immediately. Properties up to a value of £150,000 will be exempt from commercial stamp duty. For properties in the £150,000 to £250,000 bracket, commercial stamp duty will be charged at two per cent. Anything above £250,000 will be charged at the highest rate of five per cent.
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