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Everything business owners should know about using Entrepreneurs’ Relief

Back in December, the Conservative manifesto included a commitment to ‘review and reform’ Entrepreneurs’ Relief.

With a Budget just around the corner, many commentators expect the Chancellor to make changes to this useful tax relief. So, with a possible scaling back of the relief on the horizon, here’s a refresher as to what Entrepreneurs’ Relief is, and how you can make the most of it before any Budget changes.

How Entrepreneurs’ Relief works

Entrepreneurs’ Relief was introduced in 2008 under Gordon Brown’s government with the intention of replacing Business Asset Taper Relief (BATR).

BATR and retirement relief were previously available to qualifying taxpayers without any financial limit and so were more generous than the regime which replaced them.

At first the relief was limited to £1m per person, but the cap was increased several times and raised to £10m in 2011.

Business owners can qualify for the relief when they sell all or part of a company. Entrepreneurs’ Relief is currently available to clients who own their business, either as:

  • A sole trader
  • A partner in a partnership (typically 5% or more)
  • A shareholder in a company

The person must own the business for at least two whole years leading up to the disposal. The relief applies to a disposal of the whole or part of an interest in the business itself, or of an asset used in the business.

Currently, Entrepreneurs’ Relief applies a reduced Capital Gains Tax (CGT) rate of 10% to the first £10m of qualifying gains. As the headline CGT rate is currently 20%, the relief provides a tax saving of up to £1m for qualifying taxpayers.

It can be applied over any number of disposals and the £10m cap is a lifetime limit.

Essentially, the relief means that if you sell a business you will pay tax of just 10% on the proceeds of the sale. This is compared to other types of asset where you will pay CGT at the rate of 20%. If you sell a property asset (such as a Buy to Let) you will pay CGT on the gain at 18% if you are a standard rate taxpayer and 28% if you are a higher rate taxpayer.

Could Entrepreneurs’ Relief be set to change?

Despite its popularity among business owners, there has been much criticism of Entrepreneurs’ Relief in recent years.

Last November, the former head of HMRC, Sir Edward Troup, said that the relief had ‘minimal impact on encouraging entrepreneurship in the UK’ adding that ‘it gives £2 billion CGT savings every year to those who have already made their gains and provides no incentive for real entrepreneurship’.

HMRC data shows that the existence of the tax break cost the government £2.2 billion in lost taxes collected in the 2017/18 financial year, leading the government to conclude that the relief is overly generous to the wealthy.

The prime minister, Boris Johnson, recently hinted that the government did have Entrepreneurs’ Relief in its sights, telling a group of female entrepreneurs in his constituency: “I have to tell you the Treasury is fulminating against it because there are some people who are staggeringly rich who are using that relief to make themselves even more staggeringly rich.”

However, many experts have called for the Chancellor to rethink his plans to change the valuable relief.

Miles Dean, head of international tax at Andersen Tax UK, said: “It beggars belief that just as the UK is going it alone and leaving the EU, the newly elected Tory majority government proposes to… curb a tax relief that inspires many entrepreneurs to cut loose and take risks”.

How to make the most of Entrepreneurs’ Relief before any changes

If changes to Entrepreneurs’ Relief are announced in the budget, it is likely that changes will come into effect in the 2020/21 tax year. This means that there may only be a few weeks to take advantage of the rules as they presently are.

CGT rules state that when an asset (such as an interest in a business) is sold under an unconditional legal contract, the date of this disposal is the date when the contract is signed by all parties, not at completion.

If a contract is conditional (it does not bind its parties unless and until condition(s) have been met) then, for CGT purposes, the disposal by the seller will take place when all the prior conditions have been fulfilled.

What this means is that business owners wanting qualifying disposals to be taxed under the current Entrepreneurs’ Relief regime must exchange unconditional contracts before the law changes.

If you are already selling your business, or are about to do so, you would be well-advised to ensure that you exchange contracts as soon as possible – ideally before the Budget on 11 March and certainly by 5 April 2020.

Get in touch

If you have any questions about Entrepreneurs’ Relief, or you’re a business owner looking for expert financial planning advice, please get in touch. Email hello@sovereign-ifa.co.uk or call us on 01454 416653.

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