There is to be a reduction in the 18% rate of CGT to 10% and the 28% rate of CGT to 20% for chargeable gains, except in relation to chargeable gains accruing on the disposal of residential property (that do not qualify for private residence relief), and carried interest.
These changes will affect individuals, trusts and personal representatives who pay CGT.
This measure will have effect for relevant gains accruing on or after 6 April 2016.
Provisions will make clear that a person can use any unused income tax basic rate band in the most beneficial way.
The rates for CGT in 2015/16 are:
Gains are taxable after deduction of reliefs, losses and the annual exempt amount.
The rates for CGT in 2016/17 will be:
Retaining the 28% and 18% rates for residential property is intended to provide an incentive for individuals to invest in companies over property. Note that a residential property interest includes an interest in land that has at any time in the person’s ownership consisted of or included a dwelling and an interest in land subsisting under a contract for an off-plan purchase. Rules will set out how gains should be calculated in the case of mixed use properties. The application of a 28% rate of CGT to ATED-related chargeable gains, is unchanged by this measure.
These changes will be welcomed by OEIC investors. It was already known that dividends and interest from OEICs will fall under the new dividend nil rate and personal savings allowance provisions. In addition, investors will now have reduced CGT rates applying where taxable gains arise.
Entrepreneurs' relief (ER) will be extended to external investors in unlisted trading companies. This new investors' relief will apply a 10% rate of CGT to gains accruing on the disposal of ordinary shares in an unlisted trading company held by individuals, that were newly issued to the claimant and acquired for new consideration on or after 17 March 2016, and have been held continually for a period of at least three years starting from 6 April 2016. A person's qualifying gains for investors' relief will be subject to a lifetime cap of £10 million.
Investors' relief will apply to disposals of qualifying shares held for a period of at least three years starting from 6 April 2016 that were acquired on or after 17 March 2016.
Shares are assets for the purposes of CGT with gains on disposals of such assets being chargeable to CGT. Currently, gains on disposals of most shares are subject to CGT at a rate of either 18% or 28%. Where shares qualify for ER, the first £10 million of gains accrued on the disposal of shares in a trading company by an individual who has worked for the company and owned at least 5% of the ordinary shares in the company, are taxed at a rate of 10%.
The rate of CGT charged on the qualifying gain will then be 10%, with the total amount of gains eligible for investors' relief subject to a lifetime cap of £10 million per individual. Rules will ensure that this limit applies to beneficiaries of trusts.
Extending ER to external investors should provide a financial incentive for individuals to invest in unlisted trading companies over the long term.
In particular, the review of the trading company definition will be of interest to many advisers.
Currently, HMRC consider that most companies will have some activities that are not trading activities and therefore very few companies are 100% trading. If, for example a company owns an investment product then that could be deemed an investment activity. The legislation provides that entrepreneurs' relief is not jeopardised where non trading activities are "not substantial" and in this regard, HMRC apply a 20% benchmark. In other words, companies still count as trading, if their activities", do not include to a substantial extent activities other than trading activities". Substantial in this context means more than 20%.