There are dark clouds hanging over the future of entrepreneurs’ relief, according to recent reports. And this could be significant news if you’re banking on being able to claim entrepreneurs’ relief when exiting your business and reducing your capital gains tax bill.
Paul Simmons, Senior Partner at Haines Watts Slough, clarifies the potential changes to ER and why action is needed ASAP for any owners that may be affected.
The benefit of claiming ER
Entrepreneurs’ Relief (ER) has existed since 2008, and replaced the then existing Business Asset Taper Relief – which had, in itself, replaced Retirement Relief. ER has been seen as a fairly standard financial incentive for the UK’s entrepreneurs, providing a 10% relief from Capital Gains Tax (CGT) on the first £10M of gains over your lifetime.
Bringing down your CGT bill from 20% to 10% is clearly a great saving and a really important relief for many owners. But this piece of tax legislation may be about to lose some of its shine – or disappear completely, in a worst-case scenario.
Review and reform of ER is on the cards
Wording in the Conservative Party’s manifesto for the 12 December 2019 general election contained the somewhat ambiguous aspiration to ‘review and reform entrepreneurs’ relief’. There was little to no expansion on the detail of this reform, or on the thinking behind reviewing what is a relatively established relief for the UK’s business owners.
As a relief, ER works well and is certainly seen as a workable incentive to invest in enterprise, build up a company and create jobs, revenue and enhanced GDP for the country. One might assume that the Government would want to continue this support for enterprise and entrepreneurs, but this desire has to be balanced against the estimated annual £2bn that ER costs the revenue in lost CGT income.
So, if the Government is going to tinker with ER, what’s likely to be the outcome?
How could ER be reformed?
The burning question for any entrepreneurs that have factored ER into their exit plan for selling their business is a simple one – ‘Am I still going to be able to claim my 10% relief!?’. Unfortunately, the answer to this question is not simple.
There’s a prevailing theory that HM Revenue & Customs (HMRC) and the Government are looking to aim for a standardised ‘20% tax across the board’ approach to the UK tax code.
When you look at the current tax landscape, basic income tax is at 20%, VAT is at 20% and corporation tax (CT) is currently at 19%. So, ER at 10% can look like a random favour for owners that doesn’t fit and seems unfair.
So, if ER is out of step with other tax rates, what could the Government do in Budget 2020 on 11 March to reform ER and bring the relief in line with its wider strategy?
There are three generally accepted scenarios:
- ER is abolished as a relief – the most extreme potential outcome is that ER could be abolished completely; a change that will not land well with the UK’s business leaders. Abolishing ER would be a very extreme move, especially if there’s no consultation process. However, there is the possibility of ER being replaced with another similar relief that serves the same function in a way that’s more beneficial to HMRC.
- The rate of ER is reduced – ER is a relief on the standard 20% CGT rate. So another potential course of action would be to make the rate of relief smaller. By cutting the relief, say to 5%, the incentive of ER would remain but the financial benefit to exiting owners and directors would be made less attractive.
- The qualifying conditions change – as we highlighted last year, the qualifying conditions for ER changed recently, making it important for owners to ensure they meet the more stringent ER conditions. One option is for the Government to reform these qualifying conditions once more, to remove any perceived abuse of ER. This would tighten things up, but may leave many entrepreneurs losing out and feeling short-changed by this unexpected review of the rules.
Helping you get ready for any ER changes
Our assessment at Haines Watts is that many UK business owners and entrepreneurs are blissfully unaware of the mooted changes to ER. The political manifestos were published late in the day, with the aspiration to reform ER hidden away in the small print – so, many people simply didn’t have the time to read up and prepare for change.
But the clock is very much ticking, especially if you’re in the later stages of completing a business sale, or exiting a company in which you own shares. With the 11 March Budget date creeping up quickly, there’s precious little time to take action.
If you’re worried about the impact of ER reform on your business investment, please do come and talk to us.
We can help by:
- Assisting you to speed up a sale – if you’re in the middle of a transaction, you may want to accelerate completion to before 11 March 2020, circumventing any changes that do come into play post-Budget. We can advise on speeding up the sale process and ensuring you meet this tight March deadline.
- Looking at planning options pre-Budget – there are potential planning options to consider, such as using a trust and selling shares into that trust. But you’ll need to show evidence of real arms-length commercial transactions before the 11 March cut-off date for this to work.
- Updating you on the changes, post-Budget – once we know the detail of any ER reform, we can advise you on the impact and how you can go about minimising any negative effect on your business investments and income.
At this point in time, there’s no way of accurately predicting the outcome of this unexpected reform of ER, but we do know that SOMETHING will change. The earlier you come and speak to us, the sooner we can start looking at your options and safeguarding your investments.
Talk to one of our Slough Business Advisors about preparing for ER reform, before it’s too late.
Want to know more? Call us on 01753 530333 or email firstname.lastname@example.org