Whisky drinkers could toast the chancellor on Budget night. But they were not the only winners. Individuals who buy shares could also smile.
The shortening of the capital gains tax taper for business assets means that only 25% of the nominal gain will be liable to tax after just four years, instead of 10. So investors who manage to pick winners will keep the bulk of the rewards even if they change their investments after only a few years. Smart investors should be free to transfer their capital to new companies and not feel locked into one company for a decade.
Of course more could be done: perhaps a universal rollover relief when money is switched between shares, with tax only arising when money is taken out of the portfolio. This is not an impossible dream. The government is thinking about a rollover relief for companies’ share portfolios, although it would probably be restricted to substantial holdings.
The re-definition of business assets is just as significant as the shortening of the taper. No longer will it be necessary to have 25% of a company (or five per cent for employees) to get the fast taper. All employee shares, all unquoted shares and all holdings of over five per cent in quoted companies will qualify.
Sadly, there are two catches. The first is the way the new definition is being introduced. A shareholding may become a business asset on 6 April because of the change of definition. When it is sold, the gain will have to be split into a non-business part (up to 5 April) and a business part (from 6 April). The two parts are then tapered separately.
It would have been simpler to say that the shareholding would count as a business asset for the whole of its period of ownership. This would have avoided adding extra complexity. It would also have cost the Exchequer very little.
The second catch is that only shares in trading companies can be business assets. That is fair enough, but the definition of a trading company is very restrictive. Even very modest non-trading activities can make a company non-trading. This makes it all too easy for a company to become non-trading accidentally. Let us hope that the government tackles this in the Finance Bill. After all, now that a lot more shareholdings qualify as business assets, it is an important issue for a lot more people.
While investors in many companies could celebrate on Budget day, investors in big multinationals found a rude shock buried in the press releases.
Companies with subsidiaries in a range of countries, both low and high tax, will no longer be able to average the tax rates by feeding the profits from subsidiaries into a mixer company. Groups did this in order to get all the overseas tax deducted from UK tax. That way they only paid the UK rate of 30% on their total profits.
The issues were thoroughly discussed in last year’s consultation on double tax relief. Most of us got the impression that we would basically stick with the current system. We were pleased with that result. But out of the blue, a central plank of that system has been removed. The government has, as it says, decided to keep the UK’s system of credit relief. But credit relief without mixer companies is not what we wanted to keep.
Why this attack on a well-established and accepted approach to tax planning?
It must be partly for the money. The government’s original estimate that the change would raise #300m a year was widely condemned as far too low.
Even the Treasury admitted that it might be wrong. But the government has put forward another argument. The old rules gave companies an incentive to invest in high-tax countries – they would not have to suffer the full tax rate if they could mix the income with income from lower-tax countries.
If the idea is to bring high-tax countries down to earth by cutting off investment from the UK, it is not going to work. They will attract investment from other countries instead. Meanwhile UK companies will turn down overseas opportunities for tax reasons, and their shareholders will suffer. This was a good Budget for investors. If the chancellor could just think again on double tax relief, it would be a great Budget for investors.
Richard Baron is deputy head of the policy unit at the Institute of Directors.