News & Articles
The Budget 2016: Good news for some … not so good news for others
There was a fair amount of uncertainty and worry among our entrepreneurial clients and those senior managers that we work with in the run up to the Chancellor's recent budget announcement. Working closely with our Partners at NGM Tax Law the following commentary covers aspects of the Budget relating to Entrepreneurs’ relief, tax deductibility of interest, real estate investing and private equity.
Most importantly, fears that the scope of Entrepreneurs' relief might be cut back proved to be unfounded and this will therefore remain a useful tool by means of which senior management may be incentivised. The belated steps taken to "tidy up" reforms to entrepreneurs' relief which were originally legislated for during 2015 are to be welcomed. These include the ability to claim relief where an associated disposal is made to a family member under “normal succession arrangements" and the ability to claim relief in relation to the goodwill on incorporation when a business is transferred to a company controlled by five or fewer persons or by its directors albeit only if the taxpayer holds less than 5% of the acquiring company's shares. The change in relation to goodwill applies to disposals made on or after 3 December 2014! Adjustments (with effect from 18 March 2015) to the definitions of “trading company” and “trading group”, to permit the (trading/non-trading) activities of a corporate partner to be respected and to permit a company invested in a JV to have attributed a share of the JV's activities which is proportionate to its shareholding in the JV, also are positive developments. One slightly odd effect of these adjustments is that whether a company is a trading company or the holding company of a trading group may depend upon the size of the shareholdings held by different types of investors. If any of these retrospective changes are relevant, then consideration should be given to whether an amended self-assessment return should be filed to claim relief.
Entrepreneurs of a slightly different ilk, subscribing for unlisted shares (including shares traded on AIM) newly issued on or after 17 March 2016 in a trading company (or the holding company of a trading group) for new consideration, will be able to claim entrepreneurs relief up to a (separate) £10 million lifetime limit, provided those shares are held for not less than three years (with the clock starting, for issues in the 2015-2016 tax year, from 6 April 2016). We may see a number of smaller private equity owned businesses realising a partial exit through an AIM listing in the near future with the subscribers for additional capital benefiting from the extended relief' and management teams rolling over their equity into a public vehicle.
Furthermore, for the serial entrepreneur and equally seasoned senior manager, if you are a participator in a close company, and had spotted that when the new rates of tax on dividends come into force next month taking a loan from the close company should be more efficient than receiving a dividend, then think again. To prevent a loan becoming attractive on that basis, the tax imposed on a company in respect of a loan to a participator will be increased from the rate of 25% to 32%.
A number of transactions are structured using debt instruments (other than ordinary bank debt). The reason for this is that it is an efficient form of investing for both private equity investors and investee companies. Interest is, generally speaking, a tax deductible expense but it seems that the measures being put in place may curb the appeal of using such funding structures. Where relief for interest remains available, deriving benefit from that relief may also be deferred as a result of new restrictions which will apply from 1 April 2017 to restrict to 50% (or, in the case of banks from 1 April 2016, to 25% in respect of pre- 2015 losses) the amount of profit that can be offset against losses.
On the other hand, for losses which arise on or after 1 April 2017, it will be possible to use carried forward losses against profits from other income streams or from other companies within a group. This relaxation is likely to be of more use to some groups than others – and, indeed, may be less useful where a group is private equity funded.
If you have sold your business or substantially cashed out and decided to preserve your wealth and invest in a less volatile asset class the proposed changes to the tax rules on real estate investing may be of interest. If buy-to-let investors felt somewhat beleaguered at the time of the post-Election Budget last year, the Chancellor's announcement that a capital gain from the disposal of residential property is to be subject to a surcharge set at 40% more than the rate of tax otherwise due on a capital gain arising on the disposal of assets (other than on fund manager carried interest) showed that there is to be no let-up in the effort to tilt the tax system away from incentivising real estate investment. Any hope that the 3% higher SDLT charge might not apply if a purchase is enveloped or a portfolio of a significant size was also dashed.
Finally, spare a thought for our friends in private equity. Publication of the Finance Bill will reveal precisely how the new rules on the taxation of carried interest are to work and the only light shed in the Red Book on the "finalised" new rules was that capital gains treatment will only apply when a fund undertakes investment activity with "investment horizons longer than 3 years" (rather than the two years originally mooted or the four years referred to in the draft Finance Bill). However, to the extent that capital gains tax treatment does apply, the Chancellor explained that a capital gain is to be subject to an 8% surcharge, thereby subjecting that gain to tax at a rate 40% higher than the rate which will apply to gains on disposals of other assets (except for residential property).
Now that there is a new Secretary of State for Work and Pensions and it seems that the Government will be under pressure to find additional money, aspects of this may change. We will keep in touch and let you know. In the meantime, should you have any questions or queries regarding selling your business or raising capital or the tax issues associated with it please feel free to get in touch.
NGM Tax Law LLP
T: +44 20 7148 0388
M: +44 7919 503 774
Adam Street Advisers
T: +44 20 7520 9067
M: +44 7941 843 059