Looking good for capital gains tax
The capital gains tax (CGT) measures announced in the March Budget are generally good news for investors.
For 2016/17, the higher rate of CGT has been cut from 28% to 20%, with the basic rate dropping from 18% to just 10%. If you are sitting on investments that have, for example, increased in value by £100,000, then the tax cost of selling them has just been cut by £7,112. The increase in the difference between income tax and CGT rates will make investing for capital growth, rather than income, even more attractive.
However, the CGT rates for property investors and landlords remain unchanged at 18% and 28%. That’s not really surprising given the government’s recent attitude towards this type of investment. These higher rates apply to any gain arising from the disposal of residential property that is not fully covered by the principal private residence exemption.
External investors in trading companies
Gains that qualify for entrepreneurs’ relief are taxed at a flat rate of 10%, subject to a £10 million lifetime limit. To qualify, you must have a minimum 5% shareholding and also be an employee or an officer of the company.
The relief has now been extended to external long-term investors by the introduction of what is effectively a separate investors’ relief. However, the qualifying conditions are not straightforward. For this new investors’ relief, the shares must be:
- Newly issued, and acquired by subscription for new consideration wholly in cash – and the issue and subscription must be for genuine commercial reasons;
- In an unlisted trading company or an unlisted holding company of a trading group;
- Issued on or after 17 March 2016; and
- Held for a continuous period of three years starting on or after 6 April 2016.
For the investors’ relief, the external investor must not be an employee or an officer of the company. Investors’ relief comes with its own separate £10 million lifetime limit, running in parallel with the entrepreneurs’ relief limit. Gains qualifying for investors’ relief benefit from the 10% tax rate.
If the investor transfers shares to a spouse or civil partner, the transferee will be treated as if they had subscribed for and acquired the shares at the same time as the transferor.
Investors’ relief does not benefit existing shareholders because the shares must have been issued on or after 17 March 2016. But if you decide to add to an existing shareholding and then make a partial disposal, the shares that qualify for investors’ relief will be treated as disposed of in priority to non-qualifying shares.
For example, you have an existing shareholding of 10,000 non-qualifying shares, and now subscribe for 10,000 qualifying shares. When you come to sell 10,000 shares (after the three-year qualifying period), you will be treated as if you had sold the 10,000 qualifying shares. This gain will therefore be taxed at 10%.
Contact us today if you’d like to discuss the new rules on CGT further.
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