The Budget on 11 March 2020 confirmed changes to the Entrepreneurs Relief (ER) legislation. So, not the complete abolition of the relief that some had predicted, but the reduction in the lifetime allowance from £10m (the limit when the relief was first introduced in 2008), to just £1m is still significant.
In practice, this means ER is now only worth £100,000 to an individual (£200,000 to a married couple). Furthermore, going forward there won’t be a percentage-based approach to calculating how much allowance an individual still has remaining. This means that if a person has previously utilised the new £1m lifetime allowance in full (i.e. 10% of the previous £10m allowance), this isn’t apportioned to give them another 90% of £1m, instead, they will be considered to have exhausted their allowance.
Any deals that were completed for cash before 11 March 2020 are ‘safe’ i.e. the 10% rate will still apply on up to £10m of gains. However, disposals that take place on or after 11 March 2020 will be affected by the new measures as they have immediate effect from Budget day. The draft legislation also contains rules that counter certain forestalling arrangements that seek to ‘lock-in’ the pre-Budget day lifetime limit.
A point which may catch some out is where a disposal has taken place in the current tax year for something other than cash e.g. shares, loan notes etc. The vendor may have been planning to crystallise some or all of the capital gain at the time of the transaction to utilise ER by way of making a tactical election. The draft legislation confirms that unless that election has already been made, the new lifetime limit will apply in terms of the ER available, even where the transaction itself occurred before 11 March.
Additionally, there are no transitional rules for disposals that take place after 11 March 2020, including for example: where the business ceased to trade prior to 11 March 2020, the disposal is ‘associated’ with an earlier disposal, or the capital gain in question is a deferred gain that crystallises on a chargeable event on or after 11 March 2020.
As a result of the changes in the Budget, we expect to see more clients taking an interest in alternative investor reliefs such as the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS). However, it won’t be surprising if some entrepreneurs consider leaving the UK altogether; this would be a disappointing outcome in the eyes of many given the objective of the relief has always been relief to encourage successful business people to stay in the UK and pay tax on their success.
This post was written by Sarah Howarth, Tax manager at Price Bailey who is helping both contractors and service recipients navigate the April changes. For further information, please contact Sarah via 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.