Capital taxes and trusts
ICAEW Tax Faculty provides analysis of the announcements relating to capital taxes and stamp taxes in the 2018 Budget.
Entrepreneurs’ relief: new conditions
There will be more changes to entrepreneurs’ relief (ER) to try and focus it on the intended target of genuine entrepreneurs:
ER was introduced in 2008 as a replacement for taper relief which in turn replaced retirement relief and in fact ER has much in common with retirement relief. The original concept was to allow some tax relief to business owners who traditionally treated their business as their pension when they sold up and retired
When ER was first introduced the 10% capital gains tax (CGT) rate applied to £1m of gains. The limit has now been increased to £10m and in 2017/18 the relief cost the government £2.7bn. The high cost of the relief led many to speculate that this Budget would bring about some changes to the relief and indeed it has.
Generally, to qualify for ER on the sale of a company the requirement has been that at least 5% of the business and voting rights were owned by the vendor and that the vendor was an employee or officer of the company and these conditions had to be met for at least a year before sale.
- The minimum holding period will be increased from one year to two years for sales on or after 6 April 2019.
- From 29 October 2018, shareholders must be entitled to at least 5% of the distributable profits and net assets of a company to claim the relief, as well as meeting the current requirements on share capital and voting rights.
HMRC has given us the following additional information on these changes:
“Legislation will be introduced in FB 2018-2019 to add two new conditions to the definition of an individual's personal company in s169S(3), Taxation of Chargeable Gains Act 1992. This change will have effect for share disposals on or after 29 October 2018 (Budget day). Both conditions, as well as the existing 'share capital' and 'voting rights' conditions, must be met throughout the appropriate period in order for relief to be due. The new conditions require the individual to be beneficially entitled to at least:
- 5% of the company's distributable profits and
- 5% of its assets available for distribution to equity holders in a winding up.
“References to the company include any other company which is a member of the same group.
“The same two new conditions are added to
- the conditions for relief on associated disposals in s169K(1B), so that they must both be met in relation to a material disposal consisting of shares before an associated disposal of an asset can qualify for relief; and
- the conditions for the withholding of relief on goodwill at s169LA(1), so in addition to the existing two conditions, if either of the new conditions is met following a disposal of goodwill to a close company, then relief will not be due.
“We expect the majority of shareholders to be unaffected by this measure. It will only affect those who hold shares which have voting rights that are disproportionate to the entitlement to economic benefits in the company.”
Entrepreneurs’ relief: shareholdings diluted below 5%
The government announced in the Autumn Budget 2017 that legislation would be introduced to allow entrepreneurs to claim ER if their shareholding was diluted below 5% before the actual sale. Relief would be available up to the date of the dilution. The draft legislation was published in July 2018 and we commented on it in ICAEW Rep 103/18. Changes have been made to the draft legislation to “clarify and improve the computational and qualifying rules” and the new measure will have effect for shares held at the time of fundraising events which take place on or after 6 April 2019.
Private residence relief: final period of ownership
Relief from capital gains on the sale of the principal private residence is one of the most valuable reliefs available to individuals and trustees. It allows all the sale proceeds, subject to occupation rules and a restriction to 0.5 hectares for the size of the plot, to be rolled into the purchase of the replacement property without a slice being taken out for taxes.
When the relief was introduced it was extended to cover a period of 12 months from ceasing to occupy to actual sale. Over the life of the relief this period has been 24 months and 36 months to reflect difficult market conditions when it was taking longer to sell. The extension period is currently 18 months unless the owner has left the home to go into a care home, in which case the period is 36 months.
The Chancellor announced a reduction from 18 months to nine months, from April 2020. The 36 months final period exemption available to those entering a care home is retained. There will be consultation on the change.
Private residence relief: lettings relief
Another CGT relief often used by people who have had difficulty selling their home is lettings relief whereby a maximum of £40,000 of gain per owner is exempt if the home has been rented out.
From April 2020 lettings relief will be reformed so it is only available where the owner and tenant are in shared occupation and not for a period when the entire property is rented out. There will be a consultation on the change.
It is to be hoped that the property market has picked up by 2020 otherwise several homeowners will find themselves subject to a capital gains tax charge when they do eventually sell their home.
CGT: non-residents disposing of UK land
As announced in the Autumn Budget 2017, CGT will apply to gains made by non-residents on the disposal of any UK land, extending the rules introduced in April 2015 for disposals of residential UK land. The charge will apply to disposals on or after 6 April 2019. Non-resident companies will be liable to corporation tax on their gains.
CGT: payment window
A further announcement in the Autumn Budget 2017 was to extend the early reporting and tax payment window on the disposal of residential property, which has applied to non-residents from April 2015, to UK residents. This is to apply for disposals on or after 6 April 2020.
We responded to the consultation and draft legislation published in July 2018 in ICAEW Rep 105/18 and we are pleased to note that some of our recommendations have been taken into account:
- reasonable estimates will be allowed to compute the gains if the actual valuations are not available when the return is due;
- disposals of non-UK property by UK residents are removed from the rules; and
- non-UK resident companies are also removed.
There was virtually no mention of IHT in the Budget papers, perhaps because the Office of Tax Simplification has yet to publish its review of how to simplify the tax.
A recent complication added to IHT is the residence nil rate band, with one of the most complex parts being the downsizing provisions. These were designed to allow a home-owner to downsize in their lifetime but ring-fence the value of the original property for the purpose of the relief. The intention is to introduce amendments to the legislation to clarify the downsizing rules. There will also be amendments to provide certainty over when a person is treated as inheriting property. There has been no consultation on these changes which come into effect from Budget day.
Another change to IHT relates to additions to existing trusts by UK domiciled or deemed domiciled individuals to reflect HMRC’s established legal position in relation to these additions. Where the trust was created by the individual while they were non-UK domiciled or deemed domiciled, the trust is excluded property for IHT purposes. HMRC’s view is that additions to the trust while UK domiciled or deemed domiciled are not excluded property and the legislative amendments will reflect that view.
Additional amendments will be made to ensure transfers between trusts after FB 2019-20 receives Royal Assent will be subject to additional excluded property tests.
The Chancellor announced in the Autumn Budget 2017 that a consultation would be published on the taxation of trusts to make the regime simpler, fairer and more transparent. Nearly a year later the consultation is about to be published and we will give more information on this in due course.