Recent speculation has gathered momentum in the media that the forthcoming UK Budget may bring potential changes to Entrepreneurs’ Relief (ER), with an expectation that the Chancellor will likely review the impact of the Relief in relation to its key objectives and the cost to Government.
ER was introduced in 2008 as a comfort to entrepreneurs who had just watched business asset taper relief disappear. Originally ER was based on the old retirement relief provisions, reduced gains by 4/9ths and was limited to £1m. Today’s version is far simpler, allowing a flat rate of 10% on gains up to a lifetime limit of £10m (subject to meeting the qualifying conditions). The aim of the relief, back in 2008, was “to encourage entrepreneurship in this country” with the then Chancellor, Alistair Darling adding that he would ensure “only genuine investors benefit from the reformed Capital Gains Tax (CGT) regime”.
Many tweaks since its introduction have ensured that it is only available on genuine withdrawals from a business, and only to trading businesses.
If you are in the process of exiting a business, we would advise focusing on a pre-11 March transaction date if completion dates are in sight and possible before that date. If that is not possible, there are some actions you can take now, which may mitigate any reduction in relief post 11 March should that happen. We have outlined some options and considerations below.
Options and considerations
Changes to ER are highly unlikely to be retrospective, so any qualifying transaction that takes place before any change is announced should still benefit from the relief as it applies today.
Taxpayers would need to make an actual disposal of a business, business asset or company shares in order to claim ER.
While these cannot be transferred to a spouse, they could be a gift to a child, where the transaction would be deemed to take place at market value regardless of any actual value transferred. Similarly, other ways of either gifting shares or developing a new company structure could work in terms of generating an ER-qualifying gain in advance of a Budget-day deadline. Note, however, the anti-phoenixing provisions that seek to charge income tax instead of CGT where a company is liquidated and another similar business is set up within two years of the demise of the first.
However, care must be taken when undertaking such options as above. If not making a third party sale for cash, a tax bill at 10% (instead of 20%) sounds like a good deal, but you still have to fund the tax payment. It may be harder to sell assets in future, or values may drop, especially in times of economic turmoil or uncertainty. Inheritance tax and stamp taxes also need to be considered.
CGT is calculated on a disposal date when contracts are unconditional, rather than on completion, so if terms could be agreed (and signed in binding terms) in full before 11 March, even if the actual transaction does not finalise for some months, ER will still be available.
If you are mid-deal, and would like to learn more about your options, please contact:
The information in this blog should not be regarded as financial advice. This is based on our understanding in January 2020. Laws and tax rules may change in the future.