Some reflections on the Budget for family-owned businesses
That will come as something of a relief for groups that are still catching up with the numerous changes to the business tax landscape in the last couple of Budget cycles.
The Chancellor remains committed to the Government’s existing business tax roadmap, confirming the plan to reduce corporation tax to 17 per cent by 2020 and providing additional support for businesses affected by increased business rates.
We review below a number of Budget announcements which may be particularly relevant to family-owned groups at both the investment and business level.
No reform of inheritance tax reliefs - for now
There has been speculation for some time that the Government is considering options for reform of the key IHT reliefs: business property relief (BPR) and agricultural property relief (APR).
The main news from last week’s Budget is that there is no news on this for now, as no change of policy was announced and there is no public commitment to review BPR and APR.
However, HMRC did publish a research paper (dated 24 May 2017 but only now in the public domain) which reviews the awareness of testators, beneficiaries and advisers of BPR and APR, and the use made of these reliefs in practice. The analysis was “qualitative” rather than “quantitative”, so it tells us more about the attitudes of those who were interviewed than it does about the fiscal significance of these reliefs (which were worth £3.8bn in the tax year 2014 / 15, the most recent year for which published figures are available).
The research shows that amongst interviewees who own or inherited assets qualifying for BPR and APR, their decisions were primarily influenced by wanting to keep estates or businesses intact, and pass them onto their family. The role of BPR and APR was generally seen as a way to allow that to happen; few taxpayers acquired assets specifically to take advantage of the reliefs.
It is reassuring that the research does not suggest that these reliefs are being abused.
Having undertaken this research, it seems logical that HMRC and the Treasury may be looking at options for reform. The types of changes that we might see brought forward for consultation in future include changes to the way that the “trading” test is applied; a review of the interaction of IHT relief and the CGT uplift that occurs on death; or an extension to minimum holding periods. Of course, this is mere speculation unless and until we see further Government activity in this area.
For now this simply remains an area to keep under review.
Introduction of non-resident capital gains tax for holdings of UK real estate
One of the most significant Budget announcements is the consultation on proposals to tax gains realised by non-resident investors (including individuals, trusts and companies) on the disposal of UK property, including commercial property, from April 2019.
This will represent a fundamental change to the scope of the UK tax system, as historically the UK has generally not taken up its right (preserved in almost all tax treaties) to tax non-residents on gains from the sale of UK real estate.
For any groups affected by this proposal, the priority should be getting involved in the consultation process. We would be happy to talk to businesses about potential representations in this area.
The proposals extend to taxing non-residents holding UK property through “property rich” vehicles (including widely-held investment vehicles), with tax on the sale of the property or the sale of an interest in the property rich vehicle. Whilst aligning the UK with regimes in many other jurisdictions, this removes one of the most attractive features of UK real-estate for non-UK investors, so the impact of these changes on overseas investment in UK commercial real estate is expected to be significant.
Our colleagues have reviewed the impact that these changes could have on the real estate sector – see here for further analysis.
Simplifying the taxation of trusts
The Government will launch a consultation next year on the taxation of trusts and, in particular, how the taxation of trusts might be made simpler, fairer and more transparent.
There is no further detail on precisely which aspects of trust taxation the Government intends to address. One example is a possible focus on the simplification and reform of IHT – where there may be some overlap with our comments on BPR and APR above.
An area where there is scope for improvement is in the post-2006 IHT regime for trusts, which can result in penal tax charges that discourage UK individuals from establishing a lifetime trust, regardless of their tax and non-tax motives (e.g. ensuring continuity of a family business, or ring-fencing assets for different family branches). Again, this is one to watch.
Further clampdowns on disguised employment
Whilst you could be forgiven for thinking that there are no longer any circumstances where the rewards of employment could be taxed otherwise than as earnings, further anti-avoidance measures are planned in two areas.
First, the existing “disguised remuneration” code will be further expanded to apply in a wider range of circumstances to arrangements involving privately owned companies (the so-called “close company gateway”). The new rules could apply where a company is owned by family trust and benefits are provided by the trustees to individuals who are working in the business or who are related to such individuals. For family-owned groups, the danger here is the potential for unintended consequences.
The second area is a consultation on expanding the recent off-payroll working reforms, currently applied to the public sector, to the private sector in order to address non-compliance with “IR35” (the personal service company rules). A discussion paper will also be published proposing options for reforming the test of employment status, for both employment law and tax purposes. For any groups that retain consultants, either personally or through service companies, this will potentially create an additional compliance burden and could lead to an expansion of the formal payroll (at least for tax purposes).
Removing a trap from Entrepreneurs’ Relief
To end on a positive note: the Government will consult in Spring 2018 on enabling individuals to access Entrepreneurs’ Relief in circumstances where their shareholding falls below the requisite 5 per cent qualifying level as a result of equity funding carried out for commercial purposes. This is intended to incentivise entrepreneurs to continue to be involved in their businesses after taking on external investment and (with the details to follow) looks like a helpful change.
Please do get in touch if you would like to discuss any of the measures outlined above.