Now that we’ve had time to consider more fully the Chancellor’s budget and the recent Scottish Budget, we thought it would be useful to highlight two key points relevant to business owners.
Annual Investment Allowance
Firstly, in order to encourage businesses to spend on capital equipment in the next two years rather than delaying until the effect of Brexit on the economy is known, the Government has decided to increase the Annual Investment Allowance (AIA) from £200,000 per annum to a very generous £1 million per annum from 1 January 2019. This is great news for businesses who spend a lot on heavy duty vehicles and plant and equipment each year for example. Those businesses should now consider the timing of their future expenditure to ensure they get maximum benefit from this relief. However before you rush out and buy lots of capital equipment in January, please take heed of your financial year end as first year allowances are calculated on a calendar year basis. Why is this relevant? Well, in very simple terms, it means that if your financial year end is March 2019 for example, then in that year your annual investment allowance would be made up of 9/12 of £200,000 and 3/12 of £1million – in other words, you would be eligible to claim a maximum deduction against your taxable profit of £400,000 AIA. In addition to the pro rata allowance, spending arising prior to 31 December will remain subject to an AIA cap of £200,000. Clearly if you rush out and spend £900,000 on capital equipment in January 2019 thinking that you will get the new AIA limit on the lot and be able to claim a £900,000 deduction against your taxable profit you may be sorely disappointed if your financial year end is not 31 December. The timing of capital expenditure is essential in order to maximise available reliefs.
Secondly, it’s still good news for shareholders who are looking to exit and sell their company as Entrepreneurs’ Relief is still available on any qualifying capital gain up to £10m – in other words, again in very simple terms, if you sell your shares for £5 million then assuming certain conditions are met you would pay tax at only 10% on the capital gain. However you need to be wary as the Government has tweaked two of the qualifying conditions you need to meet in order to secure this relief. The first is that for share disposals occurring on or after 29 October 2018 the holder is required to have a 5% interest in both the distributable profits and the net assets of the company – this is in addition to the existing requirement to have at least 5% of the Ordinary share capital and voting rights. Companies, particularly those with multiple share classes (Alphabet shares) may need to review the rights attaching to those shares. The second being that for disposals on or after 6 April 2019 the shares must have been held for at least two years, not one year.
Both these areas have material tax implications affecting your business or personal cash flow so a bit of forward planning would be useful to mitigate the tax impact. If you need advice in this area then please get in touch with your usual tax advisor or call us on 0131 440 5000 to discuss.