Entrepreneurs’ Relief: What does the March 2020 budget have in store?
The press reported at the end of January that the Chancellor was set to remove or reduce entrepreneurs’ relief. In this article, Shona Campbell, Head of Business Recovery & Insolvency, looks at what entrepreneurs’ relief is and what the changes in the budget may be.
What is entrepreneurs’ relief?
This is a tax relief that allows some business owners to pay a reduced amount of capital gains tax when they sell or wind-up their business. The means that the capital gains tax is paid at a lower rate of 10% instead of the usual 20% on up to £10m in gains. More about eligibility can be found here.
It was introduced in 2008 by Gordon Brown to encourage entrepreneurship and investment.
Why is the position being reconsidered?
The Institute of Fiscal Studies reported in October last year that the existence of tax breaks did not influence how much money people invested in an early-stage business. The relief is postponed to a time when the business has already been successful rather than assist the start-up process.
If the relief were removed it would provide an estimated additional £2.4Bn of tax receipts. Some industry groups believe that using this money to provide support at the start-up stage would be more beneficial to entrepreneurs and reflect the ethos of entrepreneurship better.
Finally, there is a perception that only the very rich benefit from the scheme. Boris Johnson said that it makes them “staggeringly rich”.
In summary, it is a tax break that doesn’t achieve what it was supposed to do.
OK, that’s one view. What’s the other?
There has been an outcry from many groups about the possible withdrawal of the relief. The government are facing an uproar from hardworking individuals who have spent many years investing and planning their future on the basis that entrepreneurs’ relief exists. One example is company founders who have made a significant investment into their business on the assumption that they would get it back. Another is business owners nearing retirement who have chosen to invest the money in their business rather than a pension.
There is also a desire that the UK is a “good place to do business”. Tax breaks like this encourage inward investment.
What is the Chancellor going to say on 11 March 2020?
I think it is unlikely that there will be an immediate and complete withdrawal of the tax relief. It may be that the current limit of £10m is reduced, perhaps to £1m, or that the relief is removed in respect of new investments. There might be a gradual phasing out, but we will have to wait and see.
I am concerned about the potential loss of this relief and how it will affect me?
Go and speak with your tax advisor who can talk you through the options.
The Business Recovery and Insolvency Team at MHA Henderson Loggie can assist by carrying out Members’ Voluntary Liquidations which is generally a tax-efficient way of extracting value from a business in which entrepreneurs’ relief can be claimed where eligible.