Following the Budget, the Finance Bill has now been published. Entitled “HC Bill 125” it runs to 272 pages with 86 Clauses and 13 very detailed Schedules.
Much of it is setting out tax rates, rates of duties, and consequential amendments to various Finance Acts as the result of the Budget changes announced. However, the Schedules contain a lot of detail.
Much of the Bill is irrelevant to the majority of my clients, or the changes are relatively straight forward and have already been commented on at length.
The following note looks at a few of the provisions which may be of relevance to some readers. The note does not cover the abolition of the non-dom regime and the consequential introduction of a new residence-based system: this legislation is long, complex, and will require very careful studying.
CGT Business Asset Disposal Relief
Business asset disposal relief (formerly known as entrepreneurs’ relief) was introduced on 6 April 2008 to support business investment and growth of new enterprises. Claimants include self-employed small business owners and individuals who own substantial stakes in limited companies which employ them. The gains qualifying for the relief are subject to a lifetime limit of £1,000,000 for each claimant.
Since April 2024 CGT has been charged at 10% on gains qualifying for business asset disposal relief. The change in the CGT rate will increase from 10% to 14% for disposals made on or after 6 April 2025, and from 14% to 18% for disposals made on or after 6 April 2026.
CGT Investors’ Relief
Investors’ relief was introduced on 6 April 2016. It applies a lower rate of CGT to gains accruing on the disposal of certain qualifying shares held by investors in an unlisted company who have no connection with the company. The gains qualifying for the relief are subject to a lifetime limit for each claimant.
The change in the CGT rate will increase from 10% to 14% for disposals made on or after 6 April 2025, and from 14% to 18% for disposals made on or after 6 April 2026.
CGT anti-forestalling provisions
This clause and Schedule make transitional provision connected to the in-year change to CGT rates and the investors’ relief lifetime limit, as well as the future changes to the rates of CGT applicable where business asset disposal relief or investors’ relief are claimed. Amongst other things, this Schedule includes anti-forestalling rules to prevent arrangements designed to “lock in” the CGT treatment at a particular time.
The anti-forestalling rules relate to: unconditional contracts, share reorganisations and share exchanges.
Unconditional contracts
Section 28 of the TCGA 1992 ordinarily sets the time of disposal for unconditional contracts as the time that the contract is entered into, rather than the time that it is completed. These anti-forestalling rules provide that where the relevant criteria are met the CGT rates and (where relevant) investors’ relief lifetime limit will be calculated with reference to the time of completion.
The rule in paragraph 7 is concerned with contracts entered into before 30 October 2024 and applies to the changes to the main rates of CGT and the reduction in the lifetime limit on the amount of gains that can qualify for investors’ relief. These rules are extended by those in paragraphs 11 to 14 to take account of the phased increase in the CGT rates applying for business asset disposal relief and investors’ relief.
Share reorganisations and share exchanges
In certain cases, it is possible that a disposal of the original shares at the time of a reorganisation would result in a gain that could qualify for either business asset disposal relief or investors’ relief, but a gain on a later disposal of the new holding would not qualify. For this reason, an election under sections 169Q or 169VT (election to disapply section 127) of TCGA 1992 can be made to disapply the ‘no disposal’ rule in section 127 TCGA 1992 so that a gain, in respect of which relief can be claimed, will accrue at the time of the reorganisation.
The ability to make an election even where the shares held following the reorganisation would still qualify for relief would provide an opportunity to lock in the CGT rates and the lifetime limit on gains qualifying for the relief applying before 30 October 2024 in the absence of an anti-forestalling rule. An election could also be used to lock in the CGT rates for business asset disposal relief or investors’ relief before the phased increases in these rates from 6 April 2025 and 6 April 2026.
Where the anti-forestalling rules apply, the effect is to apply the CGT rates at the time an election
If the shares held at the time the election is made would still qualify for business asset disposal relief or qualify (or potentially qualify) for investors’ relief on 30 October or the time the election is made. In some circumstances the rules will apply the CGT rates applicable immediately before the shares held ceased to meet the relevant conditions.
The rule in paragraph 8 applies where an election is made for investors’ relief purposes and a share reorganisation took place before 30 October 2024 and applies to the reduction in the lifetime limit on investors’ relief and the increase in the main CGT rates from 30 October 2024. Paragraphs 19 and 20 extend this rule to take account of the phased increase in the CGT rate for investors’ relief.
The rules in paragraphs 15 and 17 apply where an election is made for business asset disposal relief purposes and a share reorganisation, including certain transactions treated as a share reorganisation, took place before 30 October 2024 and apply to the increase in the main CGT rates and the phased increase in the CGT rate for business asset disposal relief. The rules in paragraphs 16 and 18 apply where a reorganisation takes place on or after 30 October 2024.
Internationally mobile employees
Where an employee works both in the UK and overseas and certain UK non-residence criteria are met, the employer can apply to HMRC to operate PAYE only on the proportion of earnings that relates to their UK based employment income.
Before this amendment the procedure involved a delay as the employer could not operate PAYE in line with their application until an HMRC officer had reviewed their application and issued a Direction. The new procedure will now allow employers to operate PAYE on the proportion of income that relates to UK earnings from the date of the application.
Employee ownership trusts (EOTs)
An EOT is a corporate ownership structure whereby a controlling shareholding in a company is owned by the trustees of a trust specifically set up for the benefit of the employees of the company. The trustees of the EOT are required under the terms of the trust to exercise their control of the company for the benefit of the employees. A package of tax reliefs was introduced in the Finance Act 2014 to incentivise company owners to transition their companies to ownership under an EOT.
A consultation document, Taxation of Employee Ownership Trusts and Employee Benefit Trusts was published on 18 July 2023, seeking views on a range of proposals to reform the EOT tax regime (alongside separate proposals relating to the Inheritance Tax treatment of a related form of trust, employee-benefit trusts). The consultation closed on 25 September 2023. The Government’s response to this consultation, Taxation of Employee Ownership Trusts and Employee Benefit Trusts: Summary of Responses was published at Autumn Budget 2024.
The overall policy objective of the EOT regime is to incentivise and support employee ownership as a viable and sustainable business model. The amendments made by this clause in relation to Capital Gains Tax refine the requirements to claim relief, to tackle abuse.
The amendments in relation to Income Tax will ease the administrative burden of operating bonus schemes for employees of EOT-owned companies, and provide that contributions made to trustees to fund certain costs incurred in establishing EOTs are not charged to tax provided certain conditions are met.
The changes are:
Capital gains tax
- amendments with respect to disposals of ordinary share capital of a company to the trustees of an EOT.
- introduces a requirement that the trustees of an EOT be UK resident at the time of disposal and for the remainder of the tax year of disposal.
- provides that if the trustees cease to be UK resident at any time in the first four tax years following the tax year of disposal then the claim for relief is revoked.
- introduces a “trustee independence requirement” which must be met at the time of disposal and for the remainder of the tax year of disposal. This requires that more than half of the trustees of an EOT be persons who are not excluded participators and that excluded participators do not have control of the settlement. For these purposes ‘excluded participator’ includes any company where 50% or more of the directors are themselves excluded participators.
- provides that if the trustee independence requirement ceases to be met at any time in the first four tax years following the tax year of disposal then the claim for relief is revoked.
- provides that if this requirement ceases to be met at any time after the fourth tax year following the year of disposal then the trustees are treated as having immediately disposed of and reacquired the shares at market value.
- provides that a claim for relief will not be revoked under this section if the trustees of an EOT cease to be UK resident or the trustee independence requirement ceases to be met as a result of a death in any of the first four tax years following the tax year of disposal, provided these requirements are met again within six months of the death.
- provides that where the trustee independence requirement ceases to be met as a result of a death at any time after the fourth tax year following the tax year of disposal, a deemed disposal and reacquisition by the trustees is not triggered provided that this requirement is met again within six months of the death.
- introduces a new ‘consideration requirement’ which must be met at the time of disposal. This requires the trustees to take all reasonable steps to ensure that the consideration for the acquisition of shares does not exceed market value at the time of disposal, and that any interest paid on deferred amounts of this consideration does not exceed a reasonable commercial rate.
- extends the period within which the claim for relief is revoked if the relief requirements cease to be met post-disposal, to the end of the fourth tax year following the tax year of disposal.
- provides that the period within which the trustees are treated as having immediately disposed of and reacquired the shares at market value starts from the end of the fourth tax year following the year of disposal.
- the above all apply in relation to disposals made on or after 30 October 2024.
- requires additional information to be included within the claim for relief on disposal of ordinary share capital to the trustees of an EOT. This requires that claims for relief include: a) the number of employees of the company at the date of disposal (unless the claimant cannot ascertain this number despite taking all reasonable steps, and makes a statement to that effect), and b) the consideration for the disposal.
Income tax
- Relates to the Income Tax exemption for qualifying bonus payments made to employees of an EOT-owned company. The change provides that the participation requirement is not infringed by reason of the exclusion of directors from participating in a bonus award.
- The above has effect in relation to qualifying bonus payments made on or after 30 October 2024.
- provides that where a disposal of ordinary share capital of a company has been made to the trustees of an EOT and the company makes a contribution to the trustees that would generally be chargeable to income tax as a distribution then, provided certain requirements are met, any amounts relating to the trustees’ acquisition costs may be deducted from that distribution.
- “trustees’ acquisition costs” are the consideration for the disposal, payments of interest at a reasonable commercial rate, and any liability to stamp duty or stamp duty reserve tax on the acquisition.
- The amendments made by the above have effect in relation to disposals made on or after 30 October 2024
