Budget 2016: Capital gains tax rate cut

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

George Osborne has announced that with effect from 6 April 2016 capital gains tax (CGT) rates will be cut from 28% to 20% for higher and additional rate taxpayers and from 18% to 10% for basic rate taxpayers. However the new rates will not apply to gains arising from carried interest (carry) or residential property.

UK fund managers

Today's announcement will come as a further blow to UK fund managers who, as a result of the Summer Budget 2015, are no longer entitled to reduce their capital gains made on carry through "base cost shifting".

Also in this Budget the Government has confirmed the introduction of the income-based carried interest rules. These rules will see funds having to hold investments for 40 months or more in order for UK fund managers to get full CGT treatment on payments of carry.

Entrepreneurs

The Government is extending Entrepreneur's Relief (ER) (CGT at the rate of 10%) to external investors in unlisted qualifying trading companies. The new rules will apply to newly issued shares purchased on or after 17 March 2016. Existing ER will remain for entrepeneur employees but the CGT rate cut does lessen the differential (10% v. 20%) making it a less valuable relief. Investments in qualifying companies under the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) will still benefit from the full CGT exemption.

Employees

From an employee incentives perspective, the widening of the gap between income tax and CGT rates may make the setting up of tax-advantaged share option schemes more attractive on a cost-benefit analysis. It may also encourage employees to take more interest in non-tax-advantage schemes which go to greater lengths to get into the CGT regime (such as growth share schemes and joint share ownership plans (JSOPs)) but, conversely, may result in HMRC scrutinising such arrangements more closely.