The government has announced that restrictions will be introduced so that entrepreneurs' relief cannot be claimed by those entering into "contrived structures" in which they do not hold a genuine interest in a trading company.
The UK Chancellor of Exchequer, George Osborne, delivered his 2015 Budget Speech to the House of Commons on 18 March 2015. This Alert highlights the key announcements made. Some of them were expected since they derive from draft legislation released in December. Others are new and their full potential impact may be known only when draft legislation is published next week. It is important to note that the UK election in May could alter the proposals discussed in this Alert, which does not cover each and every announcement made but summarises the key areas.
Key changes confirmed following the draft legislation of December 2014
National Insurance Contributions
Venture capital and enterprise investment
Personal allowance, savings and pensions
Key changes confirmed following the draft legislation of December 2014
- Certain investment management arrangements in which sums not linked to fund performance are received by managers of private equity firms as capital gains rather than income will be taxed as income. The legislation in this area has been undergoing revisions, and a fresh draft is anticipated next week.
- Non-residents disposing of UK real property will be subject to UK capital gains tax on such disposals, whether or not they are within the Annual Tax on Enveloped Dwellings (ATED) regime. Rates will differ between ATED and non-ATED gains and between companies and individuals. Planning in this area may involve valuations of property to ensure that gains arising prior to April 2015 are not impacted.
- UK resident but non-domiciled individuals resident in the UK and wishing to use the remittance basis of tax will be required to pay an increased charge of £60,000 if resident in the UK for 12 of the previous 14 tax years and £90,000 if resident in the UK for 17 of the previous 20 tax years. The £30,000 charge for those resident in the UK for seven of the previous nine tax years will remain the same.
- An exemption from UK withholding tax on interest for private placements will be introduced. Guidance on the extent of the application of this measure is still awaited.
- The government has confirmed it will introduce the Common Reporting Standard from 2017 and has pledged to abolish the existing Crown Dependency reporting arrangements so that they will, effectively, merge with common reporting.
- Banks will be restricted in the use of their losses arising from the financial crisis.
Entrepreneurs' relief
Individuals can benefit from entrepreneurs' relief if they have a 5-percent or more interest in a trading company. This reduces the applicable rate of capital gains tax to 10 percent. In certain joint venture structures, the requisite interest can be achieved indirectly through an interest in a joint venture company that may not, in itself, carry on a trade. The government has announced that restrictions will be introduced so that entrepreneurs' relief cannot be claimed by those entering into "contrived structures" in which they do not hold a genuine interest in a trading company. Related proposals will ensure that individuals who make "associated disposals" that also qualify for entrepreneurs' relief make an eligible disposal in a trading company or partnership.
Duane Morris comment
While this may be a legitimate anti-avoidance measure, it will likely require prudent drafting to ensure that legitimate structures are not inadvertently affected. The press release refers to direct interests in trading companies; however, a basic principle of entrepreneurs' relief is that a holding company of a trading group will also suffice and the rules should not impact such interests. Equally, the new rules regarding partnerships will require prudent drafting.
National Insurance Contributions (NICs)
Class 2 NICs will be abolished in the course of the next parliament and Class 4 NICs will be reformed following consultation. These NICs are those applicable to the self-employed.
Duane Morris comment
Reform of Class 2 NICs is welcome, but this measure is subject to the government's remaining in power following the UK election in May.
Venture capital and enterprise investment
Certain changes will be made to the venture capital and enterprise investment schemes. The main ones are the introduction of a cap of £15 million (£20 million for certain "knowledge intensive" businesses) and the limitation of a first investment to companies that are less than 12 years old, unless the investment involves a substantial change in the company's activity.
Duane Morris comment
What may be viewed as the most controversial change is likely to relate to the age of the investee company. Consideration may be required as to what involves a "substantial change," and legislation will need to account for this.
Personal allowance, savings and pensions
The government has announced that the individual personal income tax allowance will rise to £10,800 in the 2016–2017 tax year and to £11,000 in the 2017–2018 tax year. Furthermore, a new allowance of £1,000 on savings income will be introduced for basic rate taxpayers. However, the lifetime allowance for pension contributions will be reduced from £1.25 million to £1 million from 2016.
Duane Morris comment
Applying in future years, these changes will depend upon the outcome of the May election.
Anti-avoidance
As expected, various anti-avoidance measures were announced. They include a review of certain aspects of the Disclosure of Tax Avoidance Schemes (DOTAS) regime, the introduction of special penalties under the General Anti-Abuse Rule (GAAR) and certain measures against "serial avoiders."
Duane Morris comment
These measures are unlikely to be controversial since they target the most serious cases of tax avoidance.
Employment
Following the report of the Office of Tax Simplification (OTS) earlier this month, the government has pledged to review the recommendations in the report, specifically those relating to the introduction of a statutory definition of employment, and to respond in the next parliament.
Duane Morris comment
Although a definition of employment that is aligned for employment and tax law purposes is desirable, it may be more challenging in practice and this should be monitored.
Partnerships
The OTS report in January 2015 contained a number of recommendations in relation to partnerships, and the government has pledged to implement 70 percent of the proposals.
Duane Morris comment
The key point appears to be which 70 percent will be implemented, and this remains to be seen.
Simplified filing
The government has announced a review of the self-assessment system to reduce the burden on small business and individuals by way of the introduction of digital tax accounts.
Duane Morris comment
This may prove useful in some cases, but the online system of self-assessment is already reasonably straightforward in the cases which seem to be the target of this measure.
Oil and gas
In response to the challenges faced by the oil and gas industry, the government has announced that Petroleum Revenue Tax (PRT) will be cut from 50 percent to 35 percent to support continued production in older fields. The existing supplementary charge for oil companies will also be cut from 30 percent to 20 percent, backdated to January. Furthermore, an allowance will be introduced for investment in the oil and gas industry.
Duane Morris comment
This amounts to a significant boost for the oil and gas industry and those considering investment in this area, although the details of the legislation are awaited.
Other
Additional measures announced include an increase in the bank levy, restrictions on the contrived use of loss relief for certain historic losses and a review of certain inheritance tax planning.
For Further Information
For more details on the topics discussed in this Alert, please contact Jenny Wheater in our London office, any of the attorneys in our Corporate Practice Group, any of the attorneys in our Tax Practice Group or the attorney in the firm with whom you are regularly in contact.
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