There are clear indications from the Prime Minister and others that the entrepreneurs’ relief regime may not continue in its current form, but it’s not too late to take action.
In January Prime Minister Boris Johnson provided the strongest hint yet that Entrepreneurs’ Relief (ER) will be reformed or maybe even abolished in the upcoming budget on the 11th March.
He told a meeting of female entrepreneurs that the relief was helping people who were already “staggeringly rich” to become even richer.
Introduced in 2008, ER affords business owners a 10% rate of Capital Gains Tax with a lifetime allowance today of £10 million on business disposals.
A costly relief
The relief, which was originally estimated to cost the Treasury £200m a year, today costs around £2.4bn. That is estimated to be the equivalent of £100 for each household in the UK.
Clearly it is costing a lot more than was originally envisaged.
Boris Johnson isn’t the only sceptic. In its 2019 election manifesto, the Conservative party pledged to review the rate; a recent Institute for Fiscal Studies report says it doesn’t work; and Sir Edward Troup, the ex-head of HMRC, says it does not encourage entrepreneurship.
It seems certain that something is going to happen. It is clear that the government is keen to find ways to encourage entrepreneurship at an early stage rather than at the exit stage.
So what changes might the Chancellor make in March?
Given the fact that ER originally replaced Retirement Relief and Business Assets Taper Relief, it may well be reformed rather than abolished altogether. It is possible that the lifetime limit could be cut from £10m to, for instance, £1m, which is in line with the pension limit.
Perhaps the Chancellor will instead increase the tax rate on it from 10% to somewhere nearer 20%. Alternatively, it could be replaced with something completely different in line with the EIS scheme.
Time to act
So what should owner-managers do between now and March? If you’re in the middle of a sale, it will almost certainly be worth trying to complete it prior to 5th April 2020, which is the most likely date from which any changes will become effective.
If you’re not so close to completing, you could try to see if both parties are willing to exchange contracts unconditionally prior to that date, since the date of disposal for CGT (and therefore ER) purposes would be the date of exchange.
If you do not have a buyer but want to sell in the near future, you could set up a new company and make an interim disposal to that new company so that you benefit from the relief, with the subsequent sale to follow. For more information, read our advice to shareholders looking to liquidate their businesses from our Insolvency and Recovery team.
This post was written by Chris Williamson, Tax Partner at Price Bailey. If you would like to know more then please contact Chris using the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.