The first issue is ensuring that the funds can be tied up for the proposed investment term. This will remain critically important. The second issue was the impact of investment on business assets taper relief for the owners. If the proposed changes to capital gains tax made in the pre-Budget report are enacted, that risk will disappear because business assets taper relief will disappear.
Just before going to press, we had the Chancellor’s statement that a new entrepreneurs’ relief will be introduced from April 6, 2008 that will broadly speaking offer a 10 per cent rate on cumulative qualifying gains of up to £1m made on the disposal of a sole proprietor’s trading business, an interest in a trading partnership or shares in a trading company by an officer or employee of the company who holds at least 5 per cent of the company’s shares. The draft legislation for this relief is not yet available and it will be important to check if there could be any detrimental consequences in relation to this new relief for corporate investment. I will look at the new relief in more detail in a later article.
That possible risk to the new entrepreneurs’ relief aside, the choice of investment tax wrapper for companies remains the same as that for individuals, namely, UK and offshore bonds and UK and offshore mutual funds. Companies can also invest directly into equities, bonds and so on, as well as hold funds on deposit.
As I mentioned last week, the loan relationship rules have applied to capital redemption plans since February 2005. This has meant that there will be a deemed disposal of the bond every year, with deemed gains, as well as any real gains, being subject to tax. So tax deferment through capital redemption plans went out of the window, so to speak.
Losses and deemed losses under the loan relationship rules can, however, be used. More on this later. Now it looks as if we will have to consider the loan relationship rules in connection with all investment-based life policies. Broadly speaking, the new rules will:
The new rules do not distinguish between policies effected by a company before or after March 13, 1989, nor do they make exceptions for endowment policies assigned as collateral security for a commercial mortgage to the company. Therefore, pre-March 14, 1989 policies that have an investment content that are currently free of the chargeable event rules will be brought within the charge to tax in the first accounting period starting on or after April 1, 2008 and so will those exempt endowment policies.
This means there has been a massive U-turn in Government policy which will probably hit smaller businesses hardest. There is, however, one crumb of comfort, which is that the company will in future get a basic-rate tax credit for gains arising on policies with UK and certain EEA insurers. More next week.