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Understanding the finance implications from the Autumn Budget 2018

Despite stating that the Budget was for hard-working families Philip Hammond’s last Budget before Brexit had very few announcements affecting individuals’ personal tax positions. Most of the announcements will impact businesses, with the aim being to promote investment and tackle perceived tax avoidance.

The key announcements from a personal perspective were:

Entrepreneurs’ Relief

Entrepreneurs’ Relief gives a reduced Capital Gains Tax rate of 10% on qualifying disposals. A number of changes were announced to the Entrepreneurs’ Relief rules:

5% test

Currently in order for shareholders to qualify for Entrepreneurs’ Relief they must hold at least 5% of the company’s share capital, giving them at least 5% of the voting rights. For disposals made after Budget day the conditions are tightened. Shareholders must now be entitled to at least 5% of the distributable profits and net assets of the company in addition to the other tests.

For those companies with different classes of shares, giving different voting and economic rights, this could result in Entrepreneurs’ Relief not being available where it was expected to be, and we would recommend these share structures are reviewed.

We do not expect these changes to affect the availability of Entrepreneurs’ Relief on shares acquired under an Enterprise Management Incentive scheme where the 5% condition does not need to be satisfied. As a result, an EMI scheme could be worth exploring where current arrangements will fall outside of the new qualifying conditions for Entrepreneurs’ Relief.

Holding period

With effect from 6 April 2019 assets will have to be held for at least 24 months prior to disposal, doubling the holding period from the current 12 month period.

This increase in holding period will make planning for a transaction well in advance even more important than is currently the case.

Dilution below 5%

Currently, if a company issues new shares and a shareholder is diluted below 5% before a disposal they cease to qualify for Entrepreneurs’ Relief. Where the dilution below 5% takes place after 6 April 2019 Entrepreneurs’ Relief will continue to be available on the gains up to the time of the dilution.

This new measure will allow companies to raise finance by issuing new shares, and for existing shareholders not to be prevented from qualifying for the reduced rate of tax up to the point of dilution.

Personal Allowance and higher rate threshold

The Chancellor announced that with effect from 6 April 2019 the tax-free personal allowance will increase to £12,500 and the higher rate tax threshold will increase to £50,000. This is in-line with the Conservative manifesto, but is 12 months earlier than expected.

The Government quote on average a basic rate taxpayer will save £66, a higher rate taxpayer £387 and an additional rate taxpayer £236 per year.

The personal allowance is withdrawn where an individual has income over £100,000 at the rate of £1 for every £2 of income, resulting in an effective 60% tax rate. The increase in the personal allowance potentially increases the income subject to 60% tax to £25,000. If you have income of just over £100,000 we would recommend that you review whether there are any tax planning opportunities available to you.

Changes to Main Residence Relief

The previously generous letting relief that was available to homeowners who had let their home will be reduced to only be available for individuals who have shared occupation with their tenants. Furthermore, a reduction in the deemed period of ownership will reduce to 9 months from 18 months. The original 36 months of deemed occupation will remain in place for individuals who have moved into care homes. Both of these changes will take effect from April 2020.

Personal finance advice

In light of the Autumn Budget announcements if you need accountancy advice or support, contact our team here.

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