Budget 2016: some surprises for the private equity, venture capital and funds industries

Written on 17 Mar 2016

The Chancellor’s Budget 2016 threw up some surprises for the private equity/venture capital and funds industry, as well as confirmation of some expected developments. Here are the headlines:

CGT cut: From 6 April 2016, the higher rate of Capital Gains Tax (CGT) will be reduced from 28% to 20%, and the basic rate will be reduced from 18% to 10%. But there will be an 8 percentage point surcharge on these new rates (i.e. the old rates will apply) for carried interest and for gains on residential property (though the principal private residence exemption remains). We expect there will be pressure on current deals to wait until 6 April 2016 before closing so individuals can take advantage of the new rates.

Employee Shareholder Status (ESS): Budget 2016 introduces a new individual lifetime limit of £100,000 on gains eligible for CGT exemption through ESS. Previously, there was no limit on the CGT exemption available under ESS. This limit will apply to arrangements entered into on or after 17 March 2016, and will not apply to arrangements already in place. This is a significant and unexpected restriction on ESS.

Entrepreneurs’ relief (ER): ER will be extended to long term external investors (other than employees and directors) in unlisted companies. This will provide a 10% rate of CGT for gains on newly issued shares in unlisted companies purchased on or after 17 March 2016, provided they are held for a minimum of three years from 6 April 2016, and subject to a separate lifetime limit of £10 million of gains. This is a significant extension of ER for external investors who will be able to take advantage of ER without meeting the 5% threshold requirement which employees and directors have to meet.

Carried interest: The government has confirmed that it will be introducing new rules to provide that carried interest will be taxed as a capital gain only when the fund undertakes investment activity with investment horizons longer than 3 years. No further detail is yet available of the rules – we expect that we will need to wait until the Finance Bill is published on 24 March 2016 to determine whether or not any changes are to be made to the draft provisions released on 9 December 2015. Click here to read our comment on the December 2015 draft.

Limited Partnership reform: On 24 March 2016 the government will publish its response to the feedback from its July 2015 consultation on reform of the legal regime for UK Limited Partnerships, and will implement the amendments in legislation in due course. Click here to read our comment on the July 2015 consultation paper.

Deductibility of interest: The government has confirmed that it will be taking action to cap the amount of relief for interest to 30% of taxable earnings in the UK or based on the net interest to earnings ratio for the worldwide group. There will be a threshold to the application of the rules of £2m of net UK group-wide interest expense. This is intended to restrict the regime to large groups – HMRC estimate that 95% of groups will be excluded by the threshold. For those groups within the regime, there is also to be an exemption for public infrastructure projects.

We will be tracking these proposals as further details are published.