IN my previous article, I looked at the impact that a possible scrapping in the Budget of the Annual Investment Allowance might have on the taxation of business profits.
Instead of scrapping the allowance, the Chancellor has doubled the amount on which businesses of all size can claim a 100% tax write-off on most capital expenditure from £50,000 to £100,000.
The increase took effect from April 1, 2010, for a business within the charge to corporation tax and from April 6, 2010, for a business within the charge to income tax.
Many business year ends will span the date of change, so a pro rata calculation of their maximum entitlement will be required.
For a company with a calendar year end, the maximum AIA for the year ended December 31, 2010, will be £87,500 (3/12 x £50,000 plus 9/12 x £100,000). A restriction will be set so that only £50,000 of that available amount can be used for expenditure incurred before April 1, 2010, (for corporation tax) or April 6, 2010, (for income tax).
The availability of additional capital allowances will be attractive to plant-intensive businesses where the current AIA is insufficient.
It will also be welcome to related business situations such as a group of companies where one AIA has to be shared between all companies.
Another surprising Budget announcement was the increase in the amount of the most valuable capital gains tax relief available – Entrepreneurs’ Relief.
Under this relief, individual’s qualifying gains are taxed at an effective rate of 10%. The limit, which is a lifetime limit, has increased from £1m of qualifying gains to £2m for disposals on or after April 6, 2010. Gains in excess of these limits are taxed at a standard rate of 18%.
In the vast majority of cases, most saleable businesses are carried on via a limited company and Entrepreneurs’ Relief will be available on the sale of the shares in an individual’s personal company, if throughout a period of 12 months prior to the disposal the company carried on a qualifying trade and the individual owned at least 5% of the ordinary share capital and voting rights and they were an officer or employee of the company.
Relief will also be available if a company has ceased trading within a period of three years prior to its sale, as long as the above conditions were met in a period of 12 months prior to cessation.
The increase in the limit of Entrepreneurs’ Relief is a welcome move, but to secure the maximum relief it is essential that all of the qualifying conditions are met.
It may be necessary for those owning 5% of a company’s shares to become a director of the company in order to avoid losing out on a maximum of £160,000 tax relief (£2m x 18% – 10%).