The UK’s Chancellor of the Exchequer, Rishi Sunak, delivered his first Budget today, dominated by a series of measures to counter the Coronavirus outbreak. In particular, the focus was on assisting small businesses through an anticipated difficult period. The stand out points affecting fund managers insofar as our client base is concerned were the announcements on Entrepreneurs’ Relief and Pensions.
Entrepreneurs’ Relief (“ER”)
There had been some talk of ER being scrapped altogether so it came as a welcome relief when the Chancellor announced that it would remain, albeit with a significant cut to the lifetime limit.
The relief enables individuals disposing of shares in unquoted trading companies or the whole or part of an unincorporated business to benefit from a 10% rate of capital gains tax (CGT) if certain criteria are met. For shares this would include being an officer or employee of the company and holding at least 5% of the ordinary share capital.
From 11 March 2020, any disposals that qualify for relief will be subject to a £1M lifetime limit, rather than £10M. There will be anti-forestalling rules relating to contracts entered into before budget day where the transaction has not yet completed. These rules ensure that no tax advantage was sought in order ‘to lock’ in the old £10M limit and where the individuals party to the transaction are connected, the contract was entered into for commercial reasons.
The Chancellor was keen to point out that 80% of claimants will not be affected, meaning that most people do not receive more than £10,000,000 cumulatively over a lifetime in qualifying gains.
There will be two changes to the rules on claiming relief for personal pension contributions:-
- A reduction to the tapered amount of annual allowance from £10,000 to £4,000; and
- An increase to the threshold and adjusted income starting points for tapering to £200,000 (£110,000) and £240,000 (£150,000) respectively.
The annual allowance will remain at £40,000 for all individuals not affected by the tapering, which is broadly anyone earning less than £240,000 per annum. The allowance is abated by £1 for every £2 of income above this, down to a minimum of £4,000.
The lifetime allowance for pensions will increase in line with the Consumer Price Index (“CPI”), rising to £1,073,100 for 2020/21.
Income Tax Rates & Thresholds
From 6 April 2020, the tax-free personal allowance will be frozen at £12,500 and higher rate taxes will continue to commence at £50,000. After 6 April 2021 the allowance and basic rate threshold will be set with reference to the CPI.
All other rates and thresholds remain unchanged, apart from married couples allowance, which rises to £3,510 from £3,450.
Capital Gains Tax
From 6 April 2020, the annual exemption for Capital Gains Tax increases to £12,300 for individuals and personal representatives and £6,150 for trustees of settlements.
The employment allowance, which provides businesses with a Class 1 Secondary National Insurance reduction, will be increased from £3,000 to £4,000.
The starting threshold for Class 1 and 4 National Insurance will be increased from £8,632 to £9,500, which will put roughly £100 back in the pockets of most employed and self-employed workers.
The rate of Class 2 NIC will increase to £3.05 per week from £3.00.
Private Property Residence Relief (“PPR”) & Letting Relief
Although announced in the previous budget, from 6 April 2020, principal private residence relief will be available for the final nine months (as opposed to eighteen) of ownership of a residential property.
This coincides with the abolition of lettings relief in all but the most narrow of cases. Previously an individual could claim letting relief where they had both let and resided in a property at some stage during the period of ownership. From 6 April 2020, in order to claim lettings relief, a tenant needs to be in occupation of the property with the landlord. A claim for letting relief is worth up to £11,200 for an individual and £22,400 if the property has been owned and let jointly.
Corporation tax rate
The Corporation tax rate will remain at 19% with no plans announced to either increase or decrease it in the foreseeable future.
Research and Development (R&D) tax credit
From 1 April 2020, R&D tax credits will be increased from 12% to 13%. This will be of interest to fund managers that use a UK limited liability company which undertakes qualifying R&D activities.
Capital loss restrictions
For accounting periods beginning on or after 1 April 2020, UK companies that make capital gains will only able to offset up to 50% of those gains using carried forward capital losses.
A review of the fund regime
With a view to enhancing the attractiveness of the UK as a location for funds to be domiciled, the Government will undertake a review of the UK’s fund regime. This will look at both taxes (e.g. such as clarifying when fund management service are exempt from VAT)) and regulatory aspects.
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