Summer Budget 2015 - Impact on Restructuring
Winners and Losers
This week the Chancellor delivered his Summer Budget, the first of this majority Conservative Government. Whilst flexible tax-free restructuring is now close to being a reality, there is also increased complexity. There will be winners and losers from the tax changes – investment profiles will change and some businesses may find that cashflows become significantly tighter.
Flexibility to amend or release distressed debt, tax-free
Following lengthy consultation, changes to the taxation of corporate debt are being introduced into law. We’re delighted to see that the package includes the corporate rescue exemption that we raised with HMRCway back in the Autumn of 2012. From the date that the Summer Finance Bill receives Royal Assent (probably Autumn 2015), it will be possible for lenders to release or modify the terms of debts of distressed companies tax-free, without any formal insolvency process or debt for equity swap, provided the borrower would otherwise have become insolvent within 12 months. This is a welcome addition to our rescue toolkit.
New regime-wide anti-avoidance rules and untested changes to this part of the tax code still require taxpayers to take care when restructuring corporate debts.
Changes to the taxation of banks
Banks received a mixed package. The bank levy (calculated on balance sheets) is to be phased it out in favour of a bank surcharge at 8% on profits over £25m (before loss relief).
HMRC – taking tax directly from taxpayers’ bank accounts
Following consultation, the Government is going ahead with plans to take what it believes it is owed directly from a taxpayer’s bank account, from the date of Royal Assent onwards.
Safeguards are promised but it remains to be seen how effective these are in practice. Distressed companies in particular will need to proactively manage any disputes over their tax liabilities to protect cash reserves in the critical days, weeks and months of a restructuring.
Corporate winners and losers
The UK corporation tax rate falls from 20% to 18% by 2020.
Capital expenditure attracts upfront tax relief for up to £200k of spend (a reduction from the current level of £500k but which was earmarked to fall to £25k from 1 January 2016).
However groups with profits of more than £20m will have to find the cash to make their usual quarterly tax instalments three months earlier than previously, a material measure which could nudge some large companies into difficulty.
Companies will no longer be allowed tax relief for goodwill amortisation. Acquisitive groups could face increased tax bills. Exit values may also be affected, as a potentially valuable tax relief falls away.
Impacts for individuals
The Chancellor announced that the annual limit for tax relief for pension contributions is set to reduce by £1 for every £2 a person earns over £150,000 to a maximum of £210,000. This brings the maximum annual tax deductible contribution down from £40,000 to £10,000 for those earning £210,000 or more. With pensions now taxed on the way in as well as the way out - the highly paid may look at other investments to save for retirement.
For high earning investors and owners of large owner-managed businesses, changes to the taxation of dividends from 6 April 2016 are likely to significantly increase tax burdens.
The taxation of fund managers is also changing – with carried interest returns received by fund managers subject to tax at the full 28% rate of capital gains and only limited deductions allowable. This change limits tax relief obtained via the allocation of base cost of assets in fund partnerships. A consultation has also been launched to consider whether performance returns to asset managers should be taxed as a capital gain or income, although the consultation document notes the expectation that carried interest, which has been historically taxed as a gain, should continue to be taxed as a gain.
Vehicle excise duty is adjusted to recalibrate the bands to avoid more new cars being exempt as emissions improve; the likely consequence is that the duty on most new cars will rise.
Buy-to-let landlords take a hit with mortgage interest relief being restricted to 20% over time.
Inheritance tax breaks have been introduced as expected, with an extra transferable £175k main home allowance being phased in over 4 years, allowing couples to pass £1m to future generations tax-free.
The tightening of UK non-domicile rules also continues. These will be a consideration for businesses and funds employing such individuals as much as the individuals themselves – and may influence decisions around international mobility.