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Budget 2016: Five Key Changes to Consider

On Wednesday 16 March, the Chancellor of the Exchequer, George Osborne, announced a number of changes to tax policy. Pett Franklin have summarised a number of these changes for you to consider:

1.   Lifetime limit of £100,000 of capital gains available for Employee Shareholder tax relief

The relief from Capital Gains Tax (CGT) available on awards of Employee Shareholder (ESS) shares will, where the shares were acquired under agreements entered into from midnight at the end of 16 March 2016, be restricted to a lifetime limit of £100,000 of gains.

This will not affect ESS awards made under existing agreements entered into before midnight at the end of 16 March 2016, for which relief will continue to be uncapped. Combined with the cut in the higher rate of CGT to 20% this will, however, restrict the benefit of ESS relief to a maximum tax saving of £20,000. As such, it is likely to make the tax reliefs associated with ESS significantly less attractive.

It is, however, worth noting that it will continue to be possible to agree the value of ESS shares for tax purposes with HMRC in advance of making awards. Combined with HMRC’s announcement that PAYE Healthcheck and Post-Transaction Valuation Checks will cease to be available from the end of the month, it may be ESS will continue to have a role as using the relief will provide both employers and employees with greater certainty as to their tax liabilities.

2.   Changes to disguised remuneration legislation – withdrawal of relief on investment returns and tax charges on outstanding loans

The Government is introducing several technical changes to the legislation with immediate effect:

  •  Anti-avoidance rule in respect of the relief where consideration is given by the employee for a “relevant step”
  • Withdrawal of relief available in respect of investment returns where tax on original contributions has not been paid by 30 November 2016.
  • Minor technical changes to prevent double taxation and clarify that payment of an accelerated payment notice (a notice which may be served by HMRC to require immediate payment of disputed tax liabilities, repayable if HMRC does not ultimately succeed in claiming the tax) does not allow relief under from disguised remuneration charges.

However, future changes for Finance Bill 2017 have also been announced. A key point for existing participants in Employee Benefit Trusts (EBTs) which have not settled is that all outstanding loans from third parties, even where they date from before the introduction of disguised remuneration rules, there will be a charge on any amount of the loan which has not been repaid before 5 April 2019. Other changes also include:

  • In specific circumstances, it will become possible for PAYE liabilities under the legislation to be transferred from the employee to the employer
  • Any schemes which involve a debt being created between an employee and a third party, whatever the intervening steps, will attract a charge

3.   Entrepreneurs’ Relief – changes to the treatment of joint ventures and partnerships, and extension of the relief to external investors

There are two key changes being made to the availability of Entrepreneurs’ Relief (ER). Firstly, ER is being extended to disposals of shares by individual investors who have held shares in a trading company (or holding company of a trading group) continuously for at least three years. This will only however be available for newly issued shares, subscribed in exchange for new consideration, on or after 17 March 2016. It will only be available to external investors – i.e. not employees and officers of the company.

Secondly, Finance Act 2015 introduced changes to prevent the abuse of ER using joint venture structures. These changes essentially removed ER for companies which qualified as “trading” thanks to their interest in a joint venture, and therefore resulted in its removal for a number of genuine commercial structures created with no avoidance in mind.

Changes will therefore be made, backdated to disposals on or after 18 March 2015, so that a person with a direct or indirect interest of at least 5% in a joint venture will qualify for ER – effectively, the rules will look through to the underlying interest in the trading company. Similarly, where a partnership with a corporate partner is involved, the new definitions will apply if the person making the disposal is entitled to at least 5% of the partnership’s assets and profits, and controls at least 5% of the voting rights in the corporate partner.

4.   Increase on tax rate for the loans to participators charge to 32.5%

Loans to “participators” in close companies – generally, shareholders – attract a tax charge on the company of 25% if the loan is not repaid within nine months of the end of the accounting period in which it is made. If the loan is repaid, the tax charge is then refundable.

The rate of tax chargeable under the “loans to participators” rules will increase from 25% to 32.5% from 6 April 2016, bringing it in line with the upper rate of tax on dividends.

5.   Share options for non-employees

Changes to the statutory rules concerning the basis of determining taxable profits of both corporate and non-incorporated traders, and which have immediate effect, put beyond doubt that the value of any ‘money’s worth’ received in the trade must be brought into account in calculating the profits of the trade. This would, for example, cover a situation in which a self-employed individual providing services by way of a trade or profession is granted an option to acquire shares. The new rule uses the term ‘value’ (as opposed to ‘market value’). Until now, HMRC have accepted that the value of a ‘market value’ option granted to such an individual is to be taken to be its intrinsic value of ‘nil’. There is no indication that HMRC intend to adopt a different approach in consequence of the need to bring the receipt of such option into account being made clear.

Pett, Franklin & Co. LLP are experts in employee share schemes, share plans and executive incentives. If you have any questions regarding the recent Budget and its impact upon yourself or your client, call Stephen Woodhouse on 0121 348 7878.