In a Budget designed to stimulate business, the Chancellor announced a series of measures worth an estimated £10.8bn over the parliament to support small to medium-sized companies (SMEs), in particular, including cuts to capital gains tax (CGT) and corporation tax, an extension of entrepreneurs’ relief and a reduction in business rates
Corporation tax will fall to 17% by 2020-21, bringing the UK closer to the current Irish rate of 12.5%. The major surprise was an 8% cut in capital gains tax (CGT) to 10% from 18%, while the 28% rate for higher rate taxpayers dropped 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 .
When the rules are enacted in Finance Bill 2016, new provisions will make clear that a person can use any unused income tax basic rate band in the most beneficial way.
Residential property interests will 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.
However, it is important to note that the 28% rate of CGT on annual tax on enveloped dwellings (ATED) related chargeable gains is unchanged by this measure, as is the 10% rate in relation to gains that qualify for entrepreneurs’ relief; and the 20% rate in relation to non-residents’ CGT gains accruing to a company.
In a bid to encourage investment in start-ups and entrepreneurs, the government also removed some barriers to the use of entrepreneurs’ relief making it easier for business owners to pass on companies and farms to family members.
The changes to disposals and goodwill will be backdated to the date the Finance Act 2015 measures became effective on 26 March 2015. They therefore apply to associated disposals on or after 18 March 2015.
To encourage funding for start-ups, entrepreneurs’ relief will be extended to long term investors in unlisted companies. This will provide a 10% rate of CGT for gains on newly issued shares in unlisted companies purchased on or after 17 March 2016, provided they are held for a minimum of three years from 6 April 2016, and subject to a separate lifetime limit of £10m of gains. This measure will cost an estimated £125m over this parliament.
On business rates, the small business rate relief was doubled on a permanent basis and the threshold for the higher multiplier was increased to £51,000. Rates will be pegged to CPI from April 2020.
Bill Dodwell, head of tax policy at Deloitte said: ‘Business rates are being reformed – but only to benefit those operating in the smallest properties. From 2017, rates will no longer be levied on 600,000 out of 1.8 million commercial properties – up from the current 385,000 exemption. From 2020 indexation of rates will drop from the old RPI measure to CPI – but larger businesses will be concerned by the long wait.’
Estimated costs for the Exchquer of combined business tax changes (2016-2021)
Source: Budget 2016 Red Book