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Budget 202013th March 2020 Corporate
In his first Budget as Chancellor of the Exchequer, Rishi Sunak delivered a £600bn spending package, promising to "do whatever it takes to support the economy". Most of the primary focus of the Budget was based upon the short term measures that the government are putting in place to mitigate the cost of the Covid-19 outbreak.
We have picked out some of the key longer term elements of the Budget that may affect our clients who own and manage businesses, invest in businesses or may be considering buying or selling a business, below.
Capital Gains Tax and Entrepreneurs’ Relief
1. Reduction in the lifetime limit
As anticipated, yesterday's Budget featured changes to entrepreneurs’ relief (ER). Whilst the relief was not scrapped altogether it does constitute a drastic change in the regime.
With immediate effect from 11 March 2020, the lifetime limit applicable to the relief is reduced from £10m to £1m, being the level it was at when first introduced in 2008. This applies to any part of the limit that a person has used before the Budget (so, if you have already reached the £1m limit, then you no longer have any eligibility for ER on any future gains).
This limits the maximum potential capital gains tax saving per individual selling their business or businesses to £100,000 (in contrast to the £1m saving under the previous regime).
The limit will apply in the same way as it did prior to the Budget, i.e.:
(a) to all qualifying disposals of shares in or securities of a trading company;
(b) distributions following the transfer of the whole or part of a business; and
(c) assets in use on the termination of a business.
The other conditions applicable to the relief remain the same, i.e. the shareholder holds more than 5% of the shares in the company and is an employee or officer of the company. There had been concerns that the government may look at transactions where “excess net assets” are paid to the sellers as part of the share sale proceeds however, this appears to have been left alone.
It is anticipated that the reforms to ER are to save the government £6bn over the next 5 years.
In addition to the lifetime limit reduction, 2 new anti-forestalling measures are to have effect from 11 March 2020. These measures are set out below and are designed to capture all ER planning implemented in anticipation of the Budget. It is clear that HMRC were alive to such planning techniques!
(a) Unconditional contracts
In relation to previous changes to taxation regimes, there was a rule that allowed the date on which an unconditional contract was signed to be the deemed date of disposal for capital gains tax purposes. Accordingly, this would allow profits from businesses sold in accordance with such an unconditional contract to benefit from the pre-Budget regime (i.e. a lifetime ER allowance of £10m).
This will not apply and all sales will be considered as having taken place on the date of completion. The result is that all contracts entered into prior to 11 March 2020 where the sale has not yet completed will be subject to the new £1m cap.
This rule will not apply where it can be shown that:
(i) the contract was made with an unconnected party and the contract was not entered into for the purpose of exploiting the previous rules on unconditional contracts; or
(ii) the contract was made with a connected party and was entered into for wholly commercial reasons, with no intention to exploit the previous rules.
(b) Share for share exchanges
Those who have sold shares pursuant to certain share for share exchange arrangements during the 2019/20 tax year, cannot elect to disapply the rollover treatment which would previously have triggered a gain under the old tax regime. This applies:
(i) where the ownership or control of the company has not materially changed; or
(ii) the exchange results in the previous shareholders increasing their share capital
In light of the significant changes to ER, individuals may now wish to seek advice in relation to alternative structures and reliefs such as investors’ relief. Like ER, investors’ relief provides a capital gains tax rate of 10% on qualifying gains from receipts from a fresh issue of shares and maintains a lifetime limit of £10m, but it only applies to those who take a “back seat” role rather than being actively involved in the relevant company as an employee or as a paid director.
We also anticipate that the changes to ER may result in more business owners who are considering selling all or part of their business carrying out more extensive planning (such as using the reliefs of family members (if they’re involved in the business)) or exploring the option of establishing an employee ownership trust as a means of exit. This involves a sale of shares to a trustee who will hold the shares on trust for the benefit of the company's employees, thereby giving the employees indirect ownership of those shares. This structure has proved to be a good option for business owners looking to maintain their legacy and the stability of the business after exit. In addition a capital gains tax of 0% is applied. This structure will not suit every business but for more information, please see the Employee Ownership Trust page of our website.
The corporation tax rate will remain at 19% for 2019/20 and 2020/21. It was expected that the rate would reduce to 17% but this has not come to fruition.
A slight increase in the annual exempt amount for capital gains tax from £12,000 to £12,300 was also featured in the Budget announcement. This will be implemented from 6 April 2020.
In a drive to encourage innovation in the economy, the rate of Research & Development (R&D) expenditure credit will increase from 12% to 13% from 1 April 2020 to support businesses investing in R&D.
The digital services tax announced in the 2018 Autumn Budget will be introduced this year which aims to target businesses that run search engines, social media services and online market places. The tax will affect businesses with a worldwide revenue of more than £500m, of which £25m is derived from UK users.
The government have also committed to undertake a review of Enterprise Management Incentives (EMI) scheme to ensure it is operating as an effective incentive for high-growth companies to retain the best talent. The review will address whether the scheme should be opened up to more companies. For information around the services that JMW provides in relation to the establishment of EMI Schemes, please see our Employee Share Schemes and Incentives page.
It is worth mentioning the change to pension contributions. The taper of the annual allowance has been increased by £90,000, meaning that each person will have an annual allowance of £40,000 per annum up to £240,000 of adjusted income, in contrast to the previous level of £150,000. For people earning above this level, the annual allowance will be tapered down to £4,000 in contrast to the previous £10,000.
Inheritance Tax: no news is good news
Despite recommendations for a complete overhaul of the Inheritance Tax regime, no mention was made in the Budget of changes to Inheritance Tax or Family Investment Companies (“FICs”).
Joe Cobb, a Partner in our Private Client team discussed the operation of FICs and HMRC’s new designated investigation team in his recent blog.
For more information about the services provided by JMW's Private Client and Corporate teams in relation to FICs, please see our web page.
Understandably, a major focus of the announcement was the Covid-19 outbreak and the government’s plans for assisting communities and businesses in dealing with the outbreak and the anticipated adverse effects on the economy.
Look out for our blog on tips for dealing with Covid-19 in your business and the available government assistance.