Tax relief on business sales looks set to change

With the uncertainty surrounding Entrepreneurs’ Relief (ER), we look at whether entrepreneurs should consider finalising the sale of their business before the general election in four months’ time.

There are strong concerns that the relief could face reform by the next UK government, following the election due to be held in May. Entrepreneurs’ Relief is one of the most popular tax breaks in the UK and although abolition is unlikely, the new reforms could see eligibility for the relief tightened and/or the lifetime limit of £10m lowered.

What is Entrepreneurs’ Relief?

ER was introduced in 2008 and the general rules are well known. The basic idea of the relief is that for qualifying disposals Capital Gains Tax (CGT) will only be charged at 10%, rather than the usual rate of either 18% or 28%.

The taxable gain has a lifetime limit of £10m (increased in stages from £1m in 2010 and 2011) and, if the full amount is used, this could equal a saving of up to £1.8m.

Closer scrutiny of the relief

Concerns over the relief can be dated back to November, when the National Audit Office (NAO) revealed that its cost to HMRC had climbed over 500%, from £475m in 2007/08 to £2.9bn in 2013/14. The costs have continually exceeded initial estimates; with the NAO report concluding that ER ‘cannot be value for money’. It was originally thought the relief would ‘only’ cost HMRC £900m in 2013/14, £2bn less than the figures revealed.

Following the NAO report, the Labour chair of the parliamentary public accounts committee, Margaret Hodge, called for closer scrutiny of the relief to prevent abuse or fraud and there are now widespread reports the government will indeed look to introduce a new reform for ER.

What does this mean for me?

With the uncertainty surrounding such a generous relief, although we do not know for sure whether a new government would continue to support the initiative, I would encourage business owners in the region who are planning to sell their business to think about the timing.

As the relief plays a key part in a framework of tax incentives for smaller businesses it is unlikely ER will be removed altogether, but a tightening of the eligibility rules is a real possibility.

If you are considering the sale of your business, with the elections less than four months away, it may be time to bring forward your plans and act now. To ensure you maximise the relief, it is important that you plan by using tax efficient business structures and, if necessary, reorganising the existing business.

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Stephen Charles partner

Stephen Charles is a tax partner at the firm, specialising in corporate and business taxation. For more details and advice, please contact Stephen on [email protected] or 0114 266 7141.[/author_info]