24th March 2016
The Chancellor unexpectedly announced a reduction to the Capital Gains Tax Rates. From April 2016, basic rate taxpayers will pay 10% on any gains, the same rate as a qualifying entrepreneurs’ relief disposal. This is good news for investors as this means they will be able to keep more of the money they make. Although the same cannot be said for Buy To Let or second home owners who will face an 8% surcharge on gains on the sale of residential property. The new reduced rates will also not apply to the receipt of carried interest.
As mentioned above, from 6 April 2016, the Capital Gains Tax rates will be changing. With the higher rate being cut from 28% to 20% and the basic rate from 18% to 10%. There will be an additional 8% surcharge to be paid on residential property and carried interest (the share of profits or gains that is paid to asset managers), essentially keeping this at the current rates. Capital Gains Tax on residential property does not apply to individuals main homes, only to additional properties (for example a flat that you let out). With effect from 6th April 2019, payments on account of UK capital gains tax on residential properties will be due within 30 days of the date of sale. Currently sellers have between 10 and 22 months to pay. This affects both residents and non-residents (non-residents have been liable to capital gains tax on residential property since April 2015). However, it will not apply to properties used as a principle private residence in the UK.
Provisions will make clear 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.
The rates that remain unchanged are as follows;
1. ATED-related chargeable gains (28%)
2. Entrepreneurs Relief (10%)
3. Non-Residents chargeable gains (20%)
The new ‘Investors Relief’ provision has been announced to extend the scope of Entrepreneurs’ Relief (ER). From April 2016, new investors into limited unquoted trading companies will be able to claim a new ‘Investor Relief’ which has most of the same benefits of ER. The rate of CGT charged on the qualifying gain will be 10%, with the total amount of gains eligible for Investors’ Relief subject to a lifetime cap of £10 million per individual. The key difference will be that the investor will not be required to be an employee or directors of the company. A key requirement to claim the relief will be that the shares must be subscribed for on or after the 17 March 2016 and must be held for a minimum of 3 years from 6 April 2016. This new Investor Relief is in addition to the existing ER.
The Government’s view is that the reduction in CGT has been put forward 'to ensure that companies have the opportunity to access the capital they need to grow and create jobs', and to make sure that the next generation enjoys a 'strong investment culture'.
Increasing the difference between the income tax rates and CGT rates makes drawing on capital each year as a form of income more attractive. It will allow individuals to build up portfolios which can provide gains to draw down on tax efficiently in the future. Following the upcoming introduction of £5,000 in tax-free dividends, the increase in the personal allowance to £11,000 and the normal annual capital gains allowance, the reduction in CGT rates makes directly held stocks and share investments very attractive indeed in certain situations.