News
Finance Bill published
Posted on: 01 July 2010
The second 2010 Finance Bill was published on 1 July 2010.
With only 11 clauses and 5 schedules, it is extremely short, containing mainly the measures in relation to the increases in the rates of capital gains tax and VAT, and next year's reduction in the main rate of corporation tax.
In relation to capital gains tax, more detail is now provided on the effect of the change of rate on deferred and offshore gains, and there is some bad news.
Deferred gains
Unfortunately, the proposals will adversely affect some individuals who qualify for entrepreneurs' relief (ER) on a sale of shares in exchange for Qualifying Corporate Bonds (QCBs), or on a sale of assets with a reinvestment of proceeds into Enterprise Investment Scheme (EIS) shares.
From 23 June 2010, where the proceeds of a disposal are reinvested into EIS shares, or (in almost all cases) where shares are exchanged for QCBs, it will no longer be possible to defer gains and claim ER. Vendors will have to choose between electing for the gain not to be deferred, and claiming ER (which will mean paying tax at 10 per cent on the whole gain at the time of disposal), or deferring the gain and paying tax at (almost certainly) 28 per cent when the deferred gain comes into charge (unless a loan note holder qualifies for ER on redemption, e.g. by holding 5 per cent of the shares and being an employee). This will result in less flexibility and perhaps a need to sell some shares for cash or make an early second disposal, to provide funds to pay tax at 10 per cent.
In addition, pre-6 April 2008 gains that qualified for ER under transitional rules may be affected. Where such a gain was deferred in an exchange for QCBs or by reinvestment into EIS or VCT shares, and part of the deferred gain came into charge between 6 April 2008 and 22 June 2010, the remaining deferred gain (which will originally have been reduced by 4/9) will be taxed at (almost certainly) 28 per cent. This will mean that in most cases the effective tax rate is likely to be 15.56 per cent rather than 10 per cent. However, when pre-6 April 2008 deferred gains that qualify for ER come into charge from 23 June 2010, they will still be taxed at 10 per cent if there has been no chargeable event between 6 April 2008 and 22 June 2010.
Where shares are exchanged for new shares or for non-QCBs, and the gain is deferred, ER will still be available to qualifying vendors, on disposal of the new asset; i.e. there is no change, and it remains possible to elect out of the paper-for-paper exchange rules.
Offshore gains
The draft legislation contains some rules to determine whether offshore gains are treated as arising before or after 23 June 2010:
- Where an individual resumes UK residence during 2010/11, within 5 years of becoming non-resident, any gains realised whilst non-resident are treated as arising before 23 June 2010, and taxable at 18 per cent.
- Gains that are taxed on the remittance basis are treated as arising at the time they are remitted, so any gains remitted before 23 June 2010 will be taxed at 18 per cent. Where other unremitted gains are treated as remitted in 2010/11 as a result of the remittance of nominated gains, these will also be treated as arising before 23 June 2010, and taxable at 18 per cent.
- Where offshore trust gains are attributed to a UK-resident settlor in 2010/11, these will be treated as arising before 23 June 2010, and taxable at 18 per cent.
- Where offshore trust gains are charged on a UK-resident beneficiary, gains matched with capital payments received between 6 April 2010 and 22 June 2010 will be treated as arising before 23 June 2010, and taxed at 18 per cent.
