Is Entrepreneurs Relief in the Emergency Room?

Next week is likely to be very interesting. The Budget will be delivered by Rishi Sunak for the first time on the 11th of March and it likely that business owners and their advisers will be watching with more than a passing interest. It should be remembered that the Government made a significant number of promises in its Manifesto around spending commitments. In order to achieve those, it must find the money from somewhere. The Manifesto goes on to say that the rate of income tax, VAT and National Insurance will not be increased. So, the Government will have to look elsewhere to find that money.

The Manifesto states:

“We also have to recognise that some measures haven’t fully delivered on their objectives. So, we will review and reform Entrepreneur’s Relief.”

The Institute for Fiscal Studies has said that the abolition of Entrepreneurs Relief will increase the tax take for the Treasury by around £2.7bn per year if transaction numbers and values remain the same.

A review will have been conducted in Whitehall and most commentators are waiting to see how the Government will move. The section from which the above text is drawn is entitled ‘Backing entrepreneurs and innovation’. It would seem odd that the Government’s objective is to create growth in the economy through its entrepreneurs and then take away one of the flagship tax reliefs. However, this is still possible. The Government might wish to enhance or create tax reliefs that support and encourage entrepreneurs during their periods of entrepreneurship rather than at the end when they may be retiring. Entrepreneurs Relief halves the Capital Gains Tax liability on sale from 20% to 10% subject to certain conditions being satisfied such as

  1. You have been a sole trader or in the case of a Company officer or employee of the company
  2. In this capacity, you have held 5% or more of the share capital of the company and 5% of voting share capital
  3. The Company you are selling is a trading company or the holding company of a trading company
  4. You haven’t exceeded your £10 million lifetime limit

The options available to the Government are as follows:

  1. Cancel Entrepreneurs Relief and replace with a combination of R&D tax credits to support technical innovation leading to greater productivity and the Seed Enterprise Investment Scheme and its big brother the Enterprise Investment Scheme.
  2. Do nothing. This is unlikely given the extra potential revenue.
  3. Reduce the lifetime limit. Currently, a claimant can utilise the relief up to £10m in one lifetime. This has grown since the introduction of the relief in 2008 from £1m lifetime limit. This could be reduced to a smaller figure but without the numbers it is difficult to assess how much benefit this would derive the Treasury.

For retiring business owners, it may now be too late to take advantage of their Entrepreneur’s Relief unless they are about to complete. Exchanging contracts on your transaction before close of business on Tuesday may be sufficient. However, if that does not happen you may have to seriously reconsider how you plan to retire and restructure your business and ownership accordingly.

Brendan O’Brien is a Corporate Finance solicitor in our Cambridge Office Corporate and Commercial Team. He can be contacted at bobrien@twclaw.co.uk and on 01223 578070.

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