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Business Tax  •  HMRC  •  Tax Relief

Will entrepreneurs’ relief (ER) be overhauled?

By RJP LLP on 12 February, 2020

It is widely anticipated that the government intends to restrict entrepreneurs’ relief (ER) as part of an initiative to reduce the number of incentives that are perceived to favour wealthier taxpayers. There are many rumours circulating which suggest a complete overhaul  could come as early as the March Budget, but no-one can be sure at this stage. What we can be sure of is that some restrictions will be introduced, because part of Boris Johnson’s election campaigning pledged to ‘review and reform’ the current regime.

The government had already started to make it more difficult to qualify for entrepreneurs’ relief, so this shouldn’t be too much of a surprise. Revisions were announced as recently as the 2018 Budget which increased the length of the minimum qualifying period from 12 months to two years for disposals made on or after 6 April 2019. Two new conditions were also added to the definition of a qualifying company, in relation to disposals made on or after 29 October 2018. Now a claimant must be beneficially entitled to at least 5% of the company’s distributable profits and 5% of the assets available for distribution in the event of a winding up.

What is entrepreneurs’ relief?

According to the Treasury, entrepreneurs’ relief (ER) costs £2.4 billion a year in lost tax income, however we can argue that it generates significantly more than that as an incentive for entrepreneurs to launch start-ups.

It allows an individual entrepreneur to pay just 10% in capital gains tax instead of the usual 20%, on up to £10 million in gains made from building a business. Some policymakers have suggested it should be redirected to those starting up a business rather than those selling, because it is the people who are already successful that are benefiting the most. For example, the Institute for Fiscal Studies has argued that ER is not good at encouraging business investment.

Based on a thorough review of news reports, we are not expecting ER to be withdrawn completely. Instead, it is likely that the qualification criteria will be changed, making it less lucrative and more in line with pensions allowances, on the basis that entrepreneurs build and sell businesses to fund their pensions. It is widely rumoured that the maximum amount of relief may be reduced to £1m from £10m in line with the amount that  taxpayers can hold in a pension.

In addition to scaling back entrepreneurs’ relief, the government may decide to limit the tax relief available to investors, reducing this from the current £10m. Others have suggested the government could close the opportunity to new businesses and make it available only to existing established entities.  Alternatively, a review of the lifetime limits and eligibility criteria may be in store.

We will have to wait and see what the Budget brings, but in the meantime, if you are planning an exit, come and talk to us as soon as possible.

What else is coming in the Budget?

Previous Chancellors had pledged to cut corporation tax from 19% to 17% and news reports suggest this won’t go ahead as planned. Corporation tax rates are already at their historical lowest and this is another policy that would win support from new Tory voters. Instead, it is rumoured that R&D tax credits will be increased by 1% to 13% from the current 12%. An extra 1% is likely to be made available for structures and buildings capital allowances relief, when commercial properties are renovated or redeveloped.

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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.