In the Budget 2016, the Chancellor of the Exchequer announced changes to taxes relevant to startups and investors in them. This note summarises the key changes announced to capital gains tax (entrepreneurs relief), corporation tax and employee shareholder status.
The changes announced are as follows
Cutting Capital Gains Tax (CGT)
The government wants to ensure that companies have access to the capital they need to grow, and wants the next generation to be backed by a strong investment culture.
- From 6 April 2016, the higher rate of CGT will be reduced from 28% to 20%.
- The basic rate will be reduced from 18% to 10%.
- There will be an 8% point surcharge on these new rates for carried interest and for gains on residential property. This is designed as an incentive to invest in companies in preference to property which is designed to further build on HM Government’s stated desire to cool down the buy-to-let property investment market.
- Entrepreneurs’ relief will be extended to long term investors in unlisted companies. A 10% rate of CGT will apply for gains on newly issued shares in unlisted companies purchased on or after 17 March 2016, provided they are held for a minimum of three years from 6 April 2016 (subject to a lifetime limit of £10 million of gains.)
Comment: this may be of little practical relevance to investors in startups as most UK investors will claim SEIS and EIS which reduces CGT on an exit to nil once shares have been held for three years. However, it will be beneficial to those investors who fall foul of the EIS rules (for example, due to holding non-investment (advisor) shares.
2. Corporation Tax Loss Relief
Loss relief is an important part of the corporation tax regime, but the current system is viewed by HM Government as outdated.
- For losses incurred on or after 1 April 2017, businesses will be able to use carried forward losses against profits from other income streams or from other companies within a group.
- Second, the current rules enable companies to offset all of their eligible taxable profits through losses carried forward. The Budget applies a restriction of the amount of profit that can be offset through losses carried forward. From 1 April 2017 HM Government will restrict to 50% the amount of profit that can be offset through losses carried forward. The restriction will only apply to profits in excess of £5 million.
- HM Government will consult on the design of the reforms in 2016, and will legislate in 2017.
- HM Government will reduce the amount of profit that banks can offset with pre-2015 losses from 50% to 25% from 1 April 2016. This will rightfully maintain the exceptional treatment of banks’ losses relating to the financial crisis and subsequent misconduct scandals. Banks’ post-2015 losses, as well as any pre-2015 losses covered by the existing reliefs for new-entrant banks and building societies, will be treated in the same way as other industry groups.
3. Employee Shareholder Status
HM Government believes that Employee Shareholder Status (ESS) provides vital flexibility for early stage firms, and that it is right that employee shareholders receive tax benefits on shares awarded in exchange for relinquishing certain employment rights.
- Budget 2016 introduces an individual lifetime limit of £100,000 on gains eligible for Capital Gains Tax (CGT) exemption through ESS.
- This limit will apply to arrangements entered into on or after 17 March 2016, and will not apply to arrangements already in place. This change will enable employee shareholders to realise a significant growth in the value of their shares without paying any CGT.