Yesterday marked the 2016 Budget announcement by George Osborne giving an opportunity for rumours to be either confirmed or squashed. Although there were a number of changes introduced, this summary focuses on tax relieving measures and in particular, the Enterprise Investment Scheme (EIS).
Leading Up to Budget 2016
Many of the rumours leading up to the budget announcement surrounded pensions with a focus on the expected flat-rate tax relief on pension contributions. Our experience was IFAs were focused on managing pensions for their clients leading up to the budget as many were looking to take advantage of the current system (tax relief relative to your income tax bracket) before looking at alternatives such as the EIS for tax relief.
However, a U-turn occurred before the budget with Osborne moving away from these changes, with some claiming it was a result from pressure from wealthy tory members. Regardless of the reasoning, this change came as a surprise to many.
The Chancellor referred to the budget as the “budget for the next generation” with the plan to stay on track for a £10.4bn surplus by 2019-20 as to not “burden our children and grandchildren”. He focused on 5 areas believed to be key to this trajectory:
- Business tax system reform – closing loopholes and reducing reliefs and rates.
- Devolution of power – local communities are given the responsibility and reward of economic growth.
- National infrastructure – building for the future.
- Education – removing obstacles to building a future for our children.
- Indirect taxes – helping working people save.
The Enterprise Investment Scheme
There were no material changes introduced in the budget; however, legislation will need to be fully reviewed in the Finance Bill 2016 before specific changes can be revealed. The changes introduced at the Spending Review and Autumn Statement 2015 excluding energy generation from EIS, Seed EIS, Social Investment Tax Relief (SITR) (when enlarged) and VCTs as of 6 April 2016 were confirmed.
The government also confirmed they will be providing “technical clarifications to the Enterprise Investment Scheme and Venture Capital Trusts to ensure that the legislation introduced by the Finance (No.2) Act 2015 works as intended.” We will share further details once we have reviewed the draft Finance Bill 2016.
Tax Efficiency for Individuals
Besides the lack of changes to pensions, the Chancellor announced changes to CGT, ISAs and tax rates.
Currently the CGT rates range from 18% for basic rate taxpayers to 28% for the higher rate taxpayers, and these amounts will change to 10% to 20% effective April 6, 2016. The current rates will be retained for gains on residential property and carried interest; however, a new 10% rate on long term external investment in unlisted companies was introduced, which is accompanied by a maximum of £10 million of lifetime gains.
The focus was around supporting simple savings for the next generation by building on ISAs which people already understand and use. For a start, the ISA limit as of April next year is increased from £15,000 to £20,000 for everyone.
The new project is the Lifetime ISA, targeting those under 40 in an effort to provide a flexible way for the next generation to save. By mimicking the current ISA structure, under 40s will be able to save up to £4,000 in their Lifetime ISA per year, receiving a government bonus of £1 per £4 invested. The result is up to £1,000 per year, until the age of 50 is reached.
Consultation will take place to understand how to implement the flexibility many are looking for while providing ease to save for either purchasing a first home or retirement.
Building on the statement of a “budget for working people”, the personal tax allowance will be increased to £11,500 as of April next year, with the higher tax rate kicking in after £45,000.
What is next?
We will be keeping an eye out to learn more as draft legislation becomes available. As a founding member of the EIS Association, I liaise with the EISA who works closely with HMRC to not only understand legislative changes but to also represent the industry in providing sector feedback. We will continue to update our clients as more information becomes available, but we are happy to answer any questions you have in the meantime. You can contact us at 020 7843 0470.
For those looking for investment opportunities, you can see all of our currently available offers on our Open Offers page. Please note the 2015/16 deadline for cleared funds is Thursday 31 March 2016.