Budget 2013: Capital Taxes

News: March 2013

Budget 2013: Capital Taxes

Capital Gains Tax

The thresholds for capital gains tax (CGT) have increased slightly for 2013/14:

Annual exemption: £10,900 (2012/13: £10,600)
Annual exemption for most trustees and personal representatives: £5,450 (2012/13: £5,300)
Rate for gains within the basic rate band: 18% (no change)
Rate for gains above the basic rate band: 28% (no change)
Rate for gains subject to entrepreneurs’ relief: 10% (no change)
Lifetime limit for gains subject to entrepreneurs’ relief: £10 million (no change)

Selling to Employees

When a business owner sells his business, they can qualify for entrepreneurs’ relief if they sell the whole business, or a significant part which can be operated as a separate business. This relief reduces the tax payable on the sale to 10%.

The Government is proposing a new capital gains relief to encourage business owners to sell a controlling interest in a business to the employees who have worked in the business. This new tax relief will not apply until April 2014.

Seed Enterprise Investment Scheme (SEIS)

The SEIS was introduced for investments made in small new trading companies from 6 April 2012, with a limit on investments under the scheme of £150,000 per company. Each investor can subscribe for up to £100,000 of SEIS shares per tax year and get 50% income tax relief.

If that investment is funded using a capital gain made in 2012/13, 100% of the reinvested gain is exempt from CGT. The CGT exemption was to be limited to investments made only in 2012/13, but it has been extended for two further years at the rate of 50% of the gain, not 100% of the gain. This is still a significant tax saving.

The original SEIS rules contained a serious trap for investors. A company acquired from a formation agent could not qualify; it had to be incorporated with individuals rather than another company as the original subscribers. This administrative niggle has been removed for shares issued from 6 April 2013, but not for companies formed earlier.

Inheritance Tax

The inheritance tax (IHT) nil rate band will remain frozen at £325,000 until 2017/18. This is the amount of a deceased person’s estate that is free of inheritance tax.

The estate value is arrived at after deducting any debts owed by the deceased, and the value of any assets that qualify as business property, agricultural property or woodlands. A number of tax schemes exist to make use of these deductions for debts to reduce the value of the deceased’s estate on death, and hence reduce the IHT payable. To block such tax avoidance schemes the deduction of debts from the value of an estate will be prevented where:

– the debt is not repaid to the creditor; or
– the loan was used to acquire property which is exempt from IHT.

These changes will apply from the date Finance Act 2013 is passed.