What is ‘Entrepreneurs’ Relief’?
Entrepreneur’s Relief is a scheme devised by the government to encourage people to grow their businesses, as well as encouraging entrepreneurs to reinvest in other startup companies and early-stage businesses.
Initially introduced in April 2008 by Gordon Brown’s Labour government and extended over the last decade, Entrepreneurs’ Relief (ER) allows individuals to pay half the normal rate of capital gains tax (CGT).
This means that entrepreneurs only pay a rate of 10% CGT, rather than the usual 20%. This 10% is applied to a lifetime allowance of up to £10m of gains on the sale of a business, certain shares or securities of a trading company, should that individual satisfy the qualifying conditions.
Conservative Party Manifesto
In December 2019, both the Labour and the Conservative Parties pledged to review and reform ER, however, over the last few months, it is uncertain whether the Conservative Government will keep their promise and put forward plans for renovation in the Budget on 11th March 2020.
Information has not yet been formally released on the Government’s strategies, but it is understood that the options to change the existing framework are varied, with one of the most dazzling changes being that ER is scrapped completely.
Other possibilities include:
- Increasing the rate of CGT (currently 20%);
- Reducing the rate of relief (currently 10%);
- Reducing the lifetime limit from £10m, with talk of it returning to £1m;
- Increasing the shareholding requirement to qualify; or
- A combination of the above.
Arguments for the overhaul
When ER was initially introduced in 2008, it was expected to cost approximately £200m per year. However, since the extension of the relief over the past decade and the uptake being greater than predicted, the annual cost today is around £2.7bn. To put this into context, this is enough to give £100 annually to each and every household in the country. It is, therefore, possible to argue that to reform, or even abolish ER would allow for those funds (or even a percentage thereof) to be used elsewhere to benefit the general public in the UK.
In addition, there is no evidence of serious evaluation of the effectiveness of ER prior to its extension. Amongst those claiming the relief, a large group said they were unaware of entrepreneurs relief, both when founding their business and when selling it. The scheme had no influence on their decision to start a business.
Arguments against the overhaul
On the flip side, many entrepreneurs cite the challenges and difficulties around starting a business, and as such, a sufficient incentive to encourage them is paramount – due to the personal and financial risks associated with being a business founder An advantageous tax break such as ER is simply an encouragement for individuals to commit to such a venture and encourages them financially.
Since its introduction, the UK has seen an influx of start-up businesses, with the number of companies on the UK register increasing by 62% in just under a decade. Such statistics demonstrate that the Labour Government’s expectations relating to the anticipated uptake of ER, have been met.
Between now and the date the Government applies any changes to the ER framework (thought to be either the 12th March 2020 or 6th April 2020), it is likely that there will be a great deal of corporate activity as a result of shareholders seeking to protect their positions by realising or crystallising their tax liability. In particular, given the uncertainty of what exactly the Government has planned, entrepreneurs are looking to accelerate the sale of their businesses with the possibility of some business owners accepting lower offers for their businesses than they would have expected or demanded previously.
ER is not the only way in which entrepreneurs plan and manage their tax affairs however, as depending on their circumstances, an entrepreneur may be able to defer a CGT charge. Instances where this is possible include; if the proceeds are reinvested in new business assets (rollover relief) or transfer business assets to a spouse or civil partner instead of being sold (hold-over relief). If ER reforms are made, there is the expectation that more detailed future planning will need to take place, which may include individuals looking in more detail into pension arrangements and SEIS/EIS investments.
In any event, whatever the outcome of the 2020 Budget on Wednesday, it seems likely that the opportunity to make use of ER (in its current capacity) could be coming to an end, so individuals should either act now if possible or, alternatively, ensure understanding of the new landscape when it arrives.
How Primas can help
At Primas, we are experts in providing legal advice to sellers of businesses and can assist with the full spectrum of corporate activity, including share and asset disposals, reorganisations and restructurings and MBI/MBOs.
We assist sellers in ensuring that, whatever route is chosen, they get the best deal/outcome for their situation in all sectors. If you are thinking of, or currently undertaking any form of corporate activity, please do not hesitate to get in contact with any member of our corporate team today via email@example.com or firstname.lastname@example.org or call us on 01928 248 672.