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Business Tax  •  Tax Relief  •  Taxation

Act quickly to avoid disappointment – possible review of entrepreneurs’ relief

By RJP LLP on 15 January, 2020

In the past five years, UK entrepreneurs have made an estimated £108 billion from either the sale of their businesses, or from selling off stakes in their businesses, according to experts.  The Treasury has benefited too, collecting capital gains tax of almost £2.5 billion  each year as a result. The reason this latter tax revenue figure is not higher is because the current UK tax rules for business owners selling their business interests are very favourable. Thanks to a headline 10% capital gains tax rate, subject to qualifying criteria, the average business owner can achieve significant tax advantages.

The entrepreneurial tax incentives ensure that the UK’s small business economy continues to thrive and prosper; the number of new businesses registered in the UK hit a record high of 660,000 in 2018, with London representing nearly one third of this figure (216,000). Now, following the general election, this may change – and quickly - so business owners considering an exit should be mindful of the possibility that entrepreneurs' relief (ER) will be reviewed.

Government policy regarding entrepreneurs' relief

Although Boris Johnson’s government is very ‘pro business’, a number of pre-election pledges to ‘review and reform’ the capital gains tax (CGT) regime were made during the months of campaigning. It is likely that Boris Johnson will want to demonstrate to all the first time Tory voters who gave his party its landslide victory, that the Conservatives will truly be ‘looking out for the average person’. These changes could come as early as the 2020 Budget, which is scheduled to take place on 11th March.

Whilst we are not expecting entrepreneurs’ relief to be axed completely in the coming Budget, we shouldn’t be surprised if it is considerably reviewed. In effect, this process had already begun well before Boris Johnson even came into power. Phillip Hammond had already introduced new rules in April 2019, requiring company directors to have been actively trading and  in possession of their qualifying 5% shareholding for 2 years rather than the original 12 months. There has also been publicity around the fact that the reliefs incentivise entrepreneurs to sell business interests rather than to establish and grow them.

Gatebright demonstrates flexibility in ER rules

If you own a company and are considering an exit, we recommend you seek professional tax advice as soon as possible. It is also worth appreciating that although there are strict qualifying criteria for entrepreneurs’ relief (ER), the rules can in practice be interpreted with a degree of flexibility. It is therefore always worth checking before making a hasty judgement as the recent case involving Gatebright Limited demonstrates.

Gatebright was a small company that had been trading until 2014, even though the company had actually issued no invoices since 2009. This was a complex case that ended up going to appeal after a first-tier tribunal (FTT) ruling that the two company directors did not qualify for ER. HMRC argued that although the ER conditions had been satisfied, Gatebright was not a trading company for the required time period.

During the appeal, this judgement was overturned, and the company directors were able to claim the tax relief and pay just 10% on gains made. The owners of Gatebright successfully argued that although invoices had not been issued, the firm was trying to continue trading and was a victim of the 2007 financial crisis.

Without going into too much technical detail about Gatebright Ltd, the point this case demonstrates is that qualifying for entrepreneurs’ relief (ER) is not always a clear-cut decision. By speaking to a tax advisor as early on in the process as possible, you can properly ascertain your eligibility and put the appropriate plans in place for a tax efficient exit. Before the rules potentially change.

If you would like to discuss entrepreneurs’ relief and possibly selling your business, please contact us via partners@rjp.co.uk

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31 December 2020 - Review disposals of chargeable assets to avoid a possible CGT increase

Capital gains tax is due to be reviewed by the government and if a CGT rise is announced, the new rates may become effective from the next tax year on 6 April 2021. Take advice now if you are thinking of selling property or have other assets giving rise to a capital gains tax liability.