What you need to know about the upcoming changes to Entrepreneurs relief

What you need to know about the upcoming changes to Entrepreneurs Relief

Entrepreneurs often see their business as a valuable asset to provide them with pension when they retire and have been counting on Entrepreneurs’ Relief (ER) to minimise the capital gains tax on sale of their business. However, with the 2020 budget around the corner there has been much speculation about the scheme’s future. Boris Johnson has recently commented that entrepreneurs’ relief was serving to make rich people ‘even more staggeringly rich’ and indicated that the Treasury is committed to making changes.

What is the aim of Entrepreneurs Relief?

At its inception in 2008, ER was devised to provide benefit to the owners and investors who had at least a 5% stake in their company. The primary value of the relief lay in the reduced Capital Gains Tax (CGT) rate of 10%. Without ER capital gains tax would be due at 20%. The lifetime benefit limit for ER is currently £10m.

Why might Entrepreneurs Relief change?

On paper, the simplicity and minimal effect on the tax system, as well as an estimated cost to the treasury of £200m per year sounded not only beneficial but entirely feasible. Skip forward 10 years, however, and the complexities of the relief continue to stack.

The Institute for Fiscal Studies’ (IFS) recent research suggests that the reduced CGT tax rate is costing the treasury up to £2.4bn per year, which goes some way to clarify the Conservative Party’s pledge to reform ER with this year’s budget.

What is likely to change?

It is widely expected that the relief will not be totally removed. However, with all aspects of the relief under scrutiny, we could see changes to the shareholder’s stake percentage, which currently provides tax relief for large investors in companies, as well as entrepreneurs. We could also see changes to the lifetime allowance limit or CGT relief rate. We will not know which areas of ER will be targeted by the review until the budget on 11th March.

What action needs to be taken before the budget?

Any change is likely to come into effect at the start of the new tax year (6^th April). If you are currently in the process of selling your business, this date will give a critical cut off point and you should be doing all you can to get the deal completed before the end of the tax year, otherwise in a worst case scenario your capital gains tax bill could risk being doubled.

Any changes will also impact business owners looking to liquidate their companies and withdraw funds, so again timing could be crucial.

Get in touch!

Entrepreneur’s Relief, in its current state, certainly holds benefits for a large number of business owners. With specialist knowledge in tax planning, Griffin are well placed to help you plot the most beneficial route through the sale of your business. To find out more contact Misty Nickells at misty@griffinaccountancy.co.uk or call 01392 241228.