Speculation is mounting, ahead of the Budget on 11 March 2020, that the government may finally act on its manifesto promise to review Entrepreneurs’ Relief, or potentially cut it altogether.
This comes after Sir Edward Troup, former executive chair of HM Revenue & Customs (HMRC), called on the government to scrap entrepreneurs' relief – with his advice backed up by the Institute for Fiscal Studies, who said that their research indicated the relief was increasingly being used as a tax scam.
According to research, entrepreneurs’ relief costs the government up to £2.4bn in uncollected tax each year and is known to be one of the most generous reliefs in the world.
A lot of what influential people and think tanks take issue with, with this particular relief, is that it encourages entrepreneurs to pay themselves through their company, a practice they say makes it much easier for individuals to disguise earnings and get away with paying less tax than they should do.
This blog will look at what entrepreneurs’ relief is, what changes are likely to come about in the new Budget, and what you can do to get ahead of the changes and lock in the best possible tax rate for yourself as an entrepreneur.
What Is Entrepreneurs’ Relief?
Put simply, entrepreneurs’ relief offers a reduced rate of Capital Gains Tax (10%) due on capital gains that arise on the sale of a business, or the sale of a stake in a business, as long as certain conditions are met. This relief is available only to individuals, and for up to £10million of qualifying gains over their lifetime.
Entrepreneurs’ relief can apply to:
- Shares in a trading company
- An entire business, or part of it
- Assets in use on the cessation of a business
- Sales of personal assets associated with any of the above
What Are The Conditions?
When it comes to the sale of shares or securities in a business, or the holding company of any trading group, on disposal of these shares the sale should qualify for entrepreneurs’ relief under current rules. The conditions to this are:
- The shares must have been held for at least two years
- The owner of the shares must hold at least 5% of the company’s ordinary share capital and 5% or more of the voting rights. They should also be entitled to either, a) 5% of distributable profits and 5% of the company’s overall assets on winding-up; or b) 5% of the proceeds if the whole of the ordinary share capital of the company were to be sold for market value.
- The owner of the shares is an officer of the company, or one of the companies in the same trading group. An employee would also count.
Is Entrepreneurs’ Relief A Method Of Tax Avoidance?
One of the main criticisms of entrepreneurs’ relief is that it makes it too easy for people to avoid tax. This relief makes possible that a person can work as a contractor, generating their earnings off-payroll through a limited company, and taking their money through dividends in order to save on tax. When the company is later dissolved, this person can then claim entrepreneurs’ relief on any remaining capital.
Whilst this offers a great boost to those who follow this strategy, it can be argued that it exploits what the benefit was originally designed to do. At inception, entrepreneurs’ relief was designed to benefit those who were running businesses that could scale-up and create employment, instead of being used as part of a multi-pronged tax planning strategy. While the latter scenario is perfectly legal, it is not really what the relief scheme was intended to encourage and accomplish.
There are other reliefs available for SMEs, designed to help them to access funds when they may otherwise struggle to do so, such as the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS). These tax breaks have proven their worth in allowing companies to expand and create jobs. However, when it comes to entrepreneurs’ relief, many claim there is no data to support that this relief is worth its cost to HMRC.
What Entrepreneurs' Relief Changes Are Expected In 2020?
The Conservative Party, in their 2019 election manifesto, proposed a review of the relief, to tackle the aspects that no longer match up to what was originally intended at its inception.
The Labour Party proposed to scrap the relief altogether and then align the rates of income tax and capital gains tax. With the Conservatives holding the power, there is no guarantee that the relief will be axed, but considering the sheer number of voices criticising the relief and calling for its cessation, it looks likely that there will be some form of change announced in the coming budget.
When Would These Changes Take Place?
The 2020 Budget will be announced on 11 March 2020, which is theoretically the very earliest that changes to entrepreneurs’ relief could take place. In most cases, however, changes announced in the budget do not actually come into force until the new tax year at the very earliest, which would make it 6 April 2020.
However, the government tends to go through a consultation and trial process before making big changes, so there is no clear time frame for when changes, if any, will take place.
What Does This Mean For You?
If you are in a position where you are looking to sell your business and want to take advantage of entrepreneurs’ relief, as it stands, this announcement gives you until Wednesday 11 March 2020 to decide if you want to sell quickly or wait to see what is announced in the Chancellor’s Budget.
If you decide to wait and still want to take advantage of capital gains tax relief, you may be able to defer your capital gains charge by reinvesting the proceeds from the sale of the company into new business assets. Capital gains tax can also be put off if you transfer business assets to a spouse or civil partner instead of selling them.
This means that there are still plenty of options for those who want to take advantage of tax reliefs on the sale of their business, but for those who are relying on entrepreneurs’ relief, the only thing you can really do is wait for the Budget announcement and plan from there.
If you want to have a professional appraisal of your current tax situation to get “ahead of the curve” with relation to the potential upcoming changes then why not contact the team at TFMC on 0800 470 4820 or email [email protected]. The window of time in which changes can be made is closing rapidly, so call us now for more help and information and to see what potential tax saving you could achieve.