Entrepreneur’s Relief – Possible Changes Ahead
As interminable January (and Brexit) comes to an end, thoughts can now turn to Spring, and in particular, the new Chancellor Sajid Javid’s first Budget, scheduled for 11 March 2020.
While the exact contents of the Budget cannot be ascertained without the use of a crystal ball, one topic generating very low odds at the moment is the prospect of changes to Entrepreneurs’ Relief (ER).
ER was introduced in 2008 as a salve to the injured feelings of entrepreneurs who had just watched business asset taper relief disappear before their eyes. The first incarnation of ER was based on the old retirement relief provisions, reduced gains by 4/9ths and was limited to £1m. Today’s version is far simpler, allowing a flat rate of 10% on gains up to a lifetime limit of £10m, subject to meeting the qualifying conditions. The aim of the relief, back in 2008, was “to encourage entrepreneurship in this country” with Alistair Darling adding that he would ensure “only genuine investors benefit from the reformed capital gains tax regime”.
So why would ER require changing? The many tweaks along the way have ensured that it is only available on genuine withdrawals from a business, and only to trading businesses.
The official reason, as stated in the Conservative manifesto, is that certain tax policies have not “fully delivered on their objective” meaning they “will review and reform Entrepreneurs’ Relief”. The possibly more accurate reason is that the cost of ER has been weighing more and more heavily on the Government, with some reports claiming it costs the equivalent of £100 per household per year. While “review and reform” isn’t necessarily meaning a reduction in relief, entrepreneurs may be forgiven for feeling a little nervous.
Action that can be taken
But what can be done? If you are in the process of an exit, all well and good, just focus on a pre-11 March transaction date, but what if this isn’t actually feasible?
Changes such as these are highly unlikely to be retrospective, so any qualifying transaction that takes place before any change is announced should still benefit from ER as it applies today. In order to crystallise a gain upon which ER can be claimed, worried taxpayers would need to make an actual disposal of a business, business asset or company shares.
While this cannot be a transfer to a spouse, it could be a gift to a child, where the transaction would be deemed to take place at market value regardless of any actual value transferred. Similarly, other ways of either gifting shares or developing a new company structure could work in terms of generating an ER-qualifying gain in advance of a Budget-day deadline. Note, however, the anti-phoenixing provisions that seek to charge income tax instead of capital gains tax where a company is liquidated and another, similar business is set up within two years of the demise of the first.
However, care must be taken when undertaking such options; if not making a third party sale for cold hard cash, a tax bill at 10% (instead of 20%) sounds like a good deal, but you still have to fund the tax payment. This is especially important in times of economic turmoil, such as Brexit is forecasted to be, as it may be harder to sell assets in future, or values may drop. Inheritance tax and stamp taxes also need to be considered.
One other point to note, however, is that capital gains tax is calculated on a disposal date when contracts are unconditional, rather than on completion, so if terms could be agreed (and signed in binding terms) in full before 11 March, even if the actual transaction does not finalise for some months, ER will still be available.
If you are in any of the positions described above, and would like to learn more about your options, please contact your local Baldwins tax specialist.