Business owners should be aware that Entrepreneurs’ Relief, a valuable tax relief when selling or liquidating a business, could be limited or even abolished altogether on 11 March.
What is Entrepreneurs’ Relief?
Entrepreneurs’ Relief applies a reduced capital gains tax rate of 10% to the first £10m of qualifying gains.
As the main rate of capital gains tax is 20%, the relief can provide a tax saving of up to £1m for qualifying taxpayers. For a married couple this could be increased to £1m each.
The £10m cap is a lifetime limit and can be applied over a number of disposals.
Further information on the current rules for Entrepreneurs’ Relief can be found here.
Why is it under threat?
The relief has been criticised for failing to fully deliver on its policy objectives and also for the high cost to the Treasury (estimated at £2.4bn per year by The Institute for Fiscal Studies).
The Conservatives pledged to “review and reform” Entrepreneurs’ Relief as part of its election manifesto and further details are expected to be announced in the forthcoming Budget. The date for the Budget has been confirmed as 11 March 2020.
Some changes were made to Entrepreneurs’ Relief last year including making it a two year qualifying period rather than one year (click here for details of the changes).
Farewell to Entrepreneurs’ Relief?
So is this the end for Entrepreneurs’ Relief?
It seems unlikely that the relief will be abolished altogether – historically there has always been a differential rate of tax for business disposals (prior to the introduction of Entrepreneurs’ Relief this was provided by business asset taper relief and retirement relief).
Nonetheless the complete abolishment of Entrepreneurs’ Relief has not been ruled out.
What might change?
The Chancellor may be considering raising the current 10% rate of capital gains tax in order to limit the amount of relief given. We could also see a reduction to the £10m lifetime limit.
The qualifying conditions for the relief could be tightened and there could be a further increase to the qualifying period.
There has even been speculation that we may go back to a relief with an age threshold, akin to retirement relief, but this seems less likely.
Of course, the review could be kicked down the street and we may not see any significant changes.
When would any changes take effect?
Although the Chancellor has vowed to review and reform Entrepreneurs’ Relief, we do not know when any changes might be effective from.
Mid-year changes to tax rates are rare and it seems more likely that any changes would apply from the start of the new tax year in April 2020 or perhaps 2021. However, this is not always the case and it is possible that any changes would take effect from 11 March.
It is hoped that the government will consult before making any significant changes to the Entrepreneurs’ Relief regime, giving interested parties an opportunity to comment on the proposals.
We could see the government introduce anti-forestalling provisions to prevent business owners taking advantage of the current regime before the change in law. However, past governments have been happy for taxpayers to trigger taxable disposals in advance of changes in tax rates – after all it brings forward the tax receipt.
What do I need to do?
The current regime is generous and it seems unlikely that the tax rate will reduce further in the foreseeable future. Therefore, if a sale is in progress, the seller may wish to ensure that they exchange contracts with the buyer prior to 11 March to ‘lock-in’ the current rate.
Those who have not yet begun the sale process but are concerned about how the potential changes to Entrepreneurs’ Relief could affect them should seek advice.
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