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Photo of James speaking at Randall & Payne's Budget Day event

Budget 2018 – Income Tax and Capital Gains Tax

Unlike many commentators and business owners, we did not believe that an attack on Entrepreneurs’ Relief was coming and indeed it did not. Hammond explained that the relief is a cornerstone of the British economy and encouraging entrepreneurship. However there were some small changes made.

Firstly a subtle change concerned the requirement that 5% of the business is owned to qualify. This is now being refined to mean 5% of distributable profits and net assets. In a company sense this means that even if a shareholder has 5% of the Ordinary Shares and voting rights, they might not be entitled to 5% of the assets and reserves if there are, for example, preference shareholders or creditors to the company. This will be tricky for investors near the 5% limit as depending upon the company’s performance, this could give a different answer every year. This measure has immediate effect and is intended to ensure that genuine committed investors or business owners are the ones who can benefit from the relief.

The second and more straightforward change is that the business asset must have been owned and qualify for relief for two years up to the date of disposal (previously one year). This second measure has effect from disposals on or after 6 April 2019.

Separately, there is a tightening of the rules for disposals of an individual’s main residence – the relief which allows us to sell our main home free of Capital Gains Tax. In the last couple of years there has been a reduction in the final “period of grace” from three years to 18 months – this allows for a delay in selling the old property so that it can still qualify up to 18 months after you move out before the actual sale. However that period of grace will be shortened again to 9 months for disposals on or after 6 April 2020.

There is also a significant restriction to the “lettings relief” element of the relief, which is worth up to £40,000 in terms of discounting a gain, which allows for a period of absence where the property is let out before being re-occupied. This will now be restricted to where the letting period is actually a period of co-ownership, meaning the owner must in fact continue to live there. In practice this would appear to make the relief redundant in most circumstances, and one questions whether it is in fact needed at all. This change is also effective from 6 April 2020.

The Budget also confirmed that the Capital Gains Tax annual exemption for 2019-20 will be set at a round £12,000 (£6,000 for trusts).

The final rabbit from the hat was the announcement that not only will they stick to their election promise to achieve a tax free personal income allowance of £12,500 and Higher Rate Tax threshold of £50,000 by 2020-21, they will in fact bring this forward a year. These will therefore be the rate for both tax years 2019-20 and 2020-21, and for future years they will increase annually in line with Consumer Prices Index.

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