This is a brief summary of some of the issues arising from the UK Budget 2016 which have an effect on corporate tax.

Reduced corporation tax rates

The current rate of 20% is already in line for a reduction to 19% in 2017, and to 18% in 2020. It has now been announced that the rate from 2020 will be 17% (always assuming we don't have a change of government before then).

Reduction in CGT rates

The current rates of 28% for higher rate taxpayers and 18% for basic rate taxpayers are being reduced to 20% and 10% respectively for disposals of most classes of asset. The current rates will continue to apply to sales of residential property (other than principal private residences which will continue to be exempt) and to carried interests. We have no information yet as to how "carried interest" will be defined for this purpose but we expect fund managers and others whose remuneration is structured in part as a partnership interest will be caught.

ESS changes

Employee Shareholder Shares or "ESS" are shares which are given to an employee in consideration of the employee giving up certain of his or her statutory employment rights. There is currently a total exemption from capital gains tax on the sale of ESS shares. However there will now be a lifetime limit on Capital Gains Tax relief under ESS of £100,000 per person: this takes effect for all ESS shares where the ESS agreement is dated on or after 17 March 2016 (tomorrow). This will make ESS arrangements much less attractive and much less common.

Changes to entrepreneurs' relief

At present ER is only available on a disposal of shares where the seller is an employee or director who has held at least 5% of the shares for at least twelve months. One potentially significant change extends ER to sales of shares in unlisted companies by individuals other than employees, who have held the shares for at least three years, subject to the usual trading requirements. Note however that this only applies to shares newly issued for new consideration after 16 March 2016, and will be subject to anti-avoidance rules to prevent abuse. Although we haven't seen any draft legislation yet, it seems unlikely that this relief will assist sellers who roll over and who wouldn't qualify for ER at the moment.

There are several other minor tweaks to ER, including corrections to the change in the last Budget which prevented ER on sales of shares in companies that invested in other companies. That change was intended to close the "management company" loophole which was widely exploited, but it also hit bona fide joint venture vehicles. It will now be pared back with retrospective effect to March 2015 to ensure that genuinely commercial arrangements are not impacted.

Corporation tax losses

At present trading losses can be surrendered within groups in the year in which they arose, or can be carried forward for future years only by the company in which they arose. It is proposed that trading losses should be able to be carried forward and surrendered to other group companies in future periods, and that there should be greater flexibility (for example it may become possible to offset trading losses against profits of a different trade, or profits that are not even trading profits). At the same time it is proposed that a group's ability to offset any profits in excess of £5m against carried forward losses will be limited to 50% of those excess profits. All these proposals will be the subject of further consultation and legislation introduced next year for April 2017. Banks, which are already subject to a 50% restriction, will see their ability to use carried forward losses further restricted to 25% with effect from 1 April 2016.

Interest deductibility

HMG have announced that with effect from next year the amount of interest which a company can deduct for corporation tax purposes will effectively be capped at the higher of (A) 30% of UK EBITDA, or (B) the level of the worldwide group's net ratio of interest to earnings.

However, this will only apply to larger groups with more than £2m of net interest costs and there will be an exemption for "public benefit infrastructure" (although the expectation is that this will be restricted to public sector projects rather than the wider real estate sector). These changes are to be introduced without any specific protections for property companies that tend to be highly leveraged, despite strong lobbying from real estate industry bodies like the British Property Federation.

Loans to participators

Loans by close companies to participators (broadly individual shareholders and directors) currently trigger a 25% tax charge which is refundable when the loan is repaid. This is primarily to prevent shareholders avoiding income tax on dividends by taking indefinite loans instead. The rate of tax on these loans is being raised to 32.5% to reflect the current top rate of tax paid on dividend income.


Various anti-avoidance provisions are being introduced. The devil as always will be in the detail once the legislation is published, but the key ones to note are as follows:

  • Royalty payments between a UK company and a connected company in another jurisdiction will be subject to withholding tax where there is a tax avoidance arrangement
  • Legislation will be introduced to implement the BEPS recommendations to combat tax avoidance in relation to "hybrids", that is financial instruments which give rise to a tax deduction in more than one jurisdiction in respect of the same expense, or which give rise to a deduction in the jurisdiction of the payer without a corresponding tax charge in the jurisdiction of the recipient