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The Finance Bill (No.2 2016)
The Finance Bill (No.2 2016) was published on 24th March 2016. The legislation itself stretches to 583 pages and there are also two volumes of explanatory notes. We have previously briefly highlighted the key issues in our post-Budget newsletter here. Our detailed comments on the Finance Bill are below.
Capital Gains Tax rate
The Finance Bill includes provisions to reduce the basic rate of capital gains tax (CGT) from 18% to 10%, and the 28% rate to 20%, on most gains made by individuals, trustees and personal representatives. It also extends the 10% rate of CGT for gains qualifying for entrepreneurs' relief to include investors' relief. Gains accruing on the disposal of interests in residential properties that do not qualify for private residence relief, and gains arising in respect of carried interest, remain subject to the 18% and 28% rates. Gains on properties subject to the Annual Tax on Enveloped Dwellings (ATED) also remain subject to the 28% rate.
The broader Finance Bill provisions for carried interest and residential property are discussed further below.
These changes take effect from 6 April 2016.
Investment management performance fees
The changes cover two key areas:
a) Disguised Investment Management Fees
b) Income Based Carried Interest
Disguised Investment Management Fees
These rules were introduced in the Finance Act 2015 and were covered in our newsletters at the time.
The rules were introduced to prevent management fees being converted from income to capital for tax purposes.
Further changes, discussed under Carried Interest below, were designed to prevent the gains being reduced by "base cost shift" tax planning. The changes in the current Finance Bill are to close some loopholes in the rules, in particular to apply the rules even if the payment arises in a different year from the services and also to apply the rules to separate accounts and other investment management arrangements even if there is no fund or partnership.
Income Based Carried Interest
This is an extension to the Disguised Investment Management Fees rules. In the Summer Budget 2015 (see our comments from the time here), two significant measures were announced in respect of the taxation of carried interest:
a) An immediate change to prevent "base cost shift" tax planning where base cost of investments is reallocated from investors (who are generally tax exempt) to the holders of carried interest (who are generally taxable).
b) A consultation document for a more fundamental change in the treatment of carried interest. The proposed legislation was included in the Draft Finance Bill 2016, published on 9th December 2015 and was covered in our newsletter from the time. Detailed provisions are now included in the Finance (No. 2) Bill 2016 and are discussed below.
The provisions tax as income a proportion of any gains arising under a carried interest scheme. Following industry lobbying, the period after which full capital gains treatment applies has been brought forward, but not the period over which full income treatment applies.