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21/01/20

In its election manifesto, the Conservative Party promised to “review and reform” entrepreneurs’ relief if it was elected. In this blog, we look at what changes to the relief may mean for entrepreneurs and whether they should consider selling up before the budget on 11 March.  

There is little doubt that entrepreneurs’ relief in its current form is on its last legs. The Conservative Party made explicit reference to it in its election manifesto, saying that it was “proud of the work we have done to support entrepreneurship… we also have to recognise that some measures haven’t fully delivered on their objectives. So, we will review and reform entrepreneurs’ relief.”

Proud it may be, but entrepreneurs’ relief (ER) was, in fact, introduced by Gordon Brown’s Labour government in 2008 to replace business asset taper relief. Its purpose was to incentivise entrepreneurs to set up and develop businesses in the UK by offering a reduced Capital Gains Tax (CGT) liability on business sales.

Despite being credited by some as helping London and the UK become one of Europe’s leading hubs for entrepreneurial activity, the relief has been consistently criticised for costing too much money. It is estimated that its abolition will add more than £2bn a year of additional tax revenues to the UK government.

What is entrepreneurs relief?

In its original form in the 2008/2009 tax year, qualifying shareholders would pay a flat rate of 10% CGT compared to the then standard 18% rate or higher 28% rate.

The qualifying conditions for the relief have been amended by subsequent governments, and a detailed summary of the current conditions is set out in my article in June of last year.

In very broad terms, the relief is available to someone who both works or holds an office in their own business and is either a sole trader, partner or shareholder with more than 5% of the shares. The person must meet these criteria for two years leading up to the disposal – this “qualifying period” was extended from 12 months from 5 April 2019.

Entrepreneurs’ relief gives qualifying shareholders a reduced CGT rate of 10% for the first £10m of qualifying gains (which is a lifetime limit). With the top rate of CGT now at 20%, the maximum saving for qualifying taxpayers is £1m.

How and when are changes likely to take place?

The next budget is on 11 March 2020, and it is possible changes will come into effect on 6 April 2020. The government may though ensure that its new tax policies incorporate “anti-forestalling” provisions designed to prevent taxpayers from taking advantage of the current regime before the law changes.

What should entrepreneurs do before the budget, if anything?

At present, it is impossible to predict how or when the relief may change. The options for taxpayers thinking about or in the process of selling their business are:

• Do nothing and see what changes are introduced. It is possible that the relief as altered (or a new relief that replaces ER) may be more advantageous to them.
• Try to lock in the current relief. To do this, they would need to exchange an unconditional contract for the sale of the business, ideally, before the date of the budget (although a later date before 5 April 2020 may still work depending on whether anti-forestalling provisions are introduced).
• If a sale is not imminent but they would still like to take advantage of ER in its current form, consider whether they can take any steps now. This would require detailed taxation and legal advice and will depend on each shareholder’s individual circumstances.

We await the budget with interest to see what changes, if any, will be made to entrepreneurs’ relief and will update you as and when we have further information.

In the meantime, if you think you may qualify for entrepreneurs’ relief or would like to find out more about it, please contact Jill Springbett.

Warning: The above is merely general guidance and should not be relied upon as formal advice. The advice we give to each client will depend on their specific circumstances. We suggest you take professional advice before taking any action in relation to the issues discussed above.