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Tax Bite - Budget 2025

This week’s Budget was indeed a smorgasbord with a few surprise ingredients. Here are a few of the highlights:-

• You will be relieved to know that the trailed punitive tax measure to charge additional taxes on members of LLPs did not feature – a big relief for many and it shows that fierce lobbying by interested parties can sometimes do the trick.
• The tax relief on sales to EOTs will now be halved – so only 50% of the gain will be tax free and 50% will be chargeable to CGT. This one was a bit of a surprise as they fully reviewed EOT’s last time round and made some changes then. This will not deter those clients that have a genuine belief in employee ownership but for those whose head was mainly turned by the nil tax outcome this may make them revisit third party sales (where at least they may get all the cash out sooner).
• Great news for companies wishing to grant employee incentives – the thresholds for EMI will be increasing from 6 April 2026 to an employee limit of 500, gross assets of £120 million and total market value of shares under option of £6 million. The individual limit of £250k worth of shares does not seem to be changing. These moves mean that some sizeable businesses will now be included, which will make EMI accessible to more employee optionholders. Also the length of time for the reliefs to apply will now be 15 years rather than 10 and existing options can be amended to accommodate this – do not do so until we see the legislation though, but perhaps make a list of all clients you have with EMI options who may wish to extend their life once the provisions are clear. Finally, from April 2027 there will be no need to notify options to HMRC – this is a welcome change as historically this has always caused headaches on deals where the target company’s records where not what they might be.
• The Government is clearly hoping to encourage investment into private companies with (from 6 April 2026) large increases to the lifetime and annual thresholds for EIS relief. But the income tax relief for VCT investments will be slashed from 30% to 20%. There is no change to SEIS relief which remains for very small start-up companies.
• In their bid to protect “working people” the Government announced an increase to the rate for savings income, dividends and property income. This is to align the rates paid on employment income by in effect mirroring the higher rate of employee NIC. Oddly the increase does not seem to apply to those that would pay the top rate of tax on dividends as it appears that will remain at 39.35% and on that basis when looking at profit extraction from reasonable sized companies dividends will still very marginally win over salary (even when factoring in the corporation tax deduction for salary).
• Salary sacrifice schemes had been restricted over the years but it was still possible to do this in favour of pension contributions. From 2029 only £2,000 will be able to be paid to a pension scheme per year through salary sacrifice arrangements without the application of NIC.
• There was no substantial progress in the reform of stamp duty on shares – there have been murmurs for some time and the results of a first consultation were released earlier this year, along with the publication of a second consultation. Some enabling powers have been introduced so that HMRC can legislate in future to create and test a new digital service for paying and reporting stamp duties, but no timings have been announced yet.

Finally, some unexpected changes to share for share exchanges have been announced in response to a recent case HMRC lost against a taxpayer. That case involved a share for share exchange which was structured in such a way that the taxpayer company took redeemable preference shares for some of its cash consideration so that it could redeem them in 12 months and claim the substantial shareholdings exemption such that it paid no tax on the redemption proceeds. The court ruled that because the transaction, as a whole was bona fide commercial (a sale to a third party) the fact that this component was tax driven was irrelevant. The draft legislation instead allows them to apply a tax avoidance motive test to the different components of a transaction as opposed to just looking at it as a whole. This will now be problematic until HMRC issues some guidance and where we had been relaxed on seeking clearance for share for share exchanges in the past we will now recommend them in all cases, as most will have something that is purely tax driven. For example:

• in a typical P/E deal where sellers have to roll over part of their proceeds at the request of the buyer, that is obviously commercial. But if the buyer is made up of a chain of new companies the usual flip up the chain for loan notes is purely for tax purposes. One would hope that HMRC confirms that this sort of arrangement is still ok as ultimately the shareholders are still getting “paper” consideration.
• in a demerger there may be very good commercial reasons to separate the two parts of the business. Often the first step is placing a newco on the top to inflate the capital attached to the shares and without that the businesses could not necessarily be separated tax efficiently. But that step is done purely for tax purposes so will HMRC now say that this is for avoidance (where maybe we then need to revert to the old style reconstructions in liquidation).

The key take away from the press release is that people who already have clearance for a share for share exchange will be ok as long as their transaction happens within 60 days of Budget Day. Those that submitted clearance before Budget Day will also be assessed under the current rules provided they implement within 60 days of receiving any clearance.