What is the difference between Entrepreneurs’ Relief and Business Asset Disposal Relief?
Business Asset Disposal Relief replaced Entrepreneurs’ Relief in the 2020 Budget. Although, it no longer exists, “Entrepreneurs’ Relief” has stuck in the mind of business owners, and some advisors! If someone refers to “Entrepreneurs’ Relief”, they more than likely mean “Business Asset Disposal Relief”.
What is the 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 £1m of lifetime gains. More about eligibility can be found here. Capital Gains Tax is generally a lower percentage than Income Tax and there is a £12,300 tax-free individual allowance.
It was introduced back in 2008 to encourage entrepreneurship and investment. Initially, the relief was unlimited, then reduced to £10m and in March 2020 to £1m.
If it was just amended in March 2020, surely the Chancellor won’t change it again in March 2021?
With current public sector debt at an all-time high, all taxes and reliefs are being looked at, including this one. Business Asset Disposal Relief is viewed by many as a relief that enables people who are already rich to avoid paying tax.
A recent report by the Office for Tax Simplification is all about making Capital Gains Tax and Reliefs simpler and fairer. The key proposals are that Income and Capital Gains Tax rates are brought in line with each other and that the relevant annual allowance is reduced to £2,000. The paper specially states that if the intention is to stimulate entrepreneurship and investment Business Asset Disposal Relief is mistargeted. The report states that the relief distorts behaviour and drives people to incorporation.
In this article, I discussed what the March 2020 budget provisions were likely to be and one of the main objections to the reduction of the relief was from hardworking individuals who have spent many years investing and planning their future on the basis that the relief exists. Particularly those nearing retirement; those business owners who have chosen to invest the money in their business rather than a pension. The paper addresses this specific concern by recommending that Business Asset Disposal relief be replaced with a relief more focused on retirement and outlines ways that this might be done. The suggestions are that a minimum shareholding and length of share ownership of 25% and 10 years respectively are introduced. It also suggests introducing a minimum age such as 55 for the relief to apply which is line with when individuals can access their pension.
What is the Chancellor going to say in the Budget 2021?
Certainly, there are going to be tax hikes and relief reductions across the board. Business Asset Disposal relief seems unlikely to escape. I don’t think the relief will be scrapped but that it will be reduced. Any tax savings under the amended relief will be further impacted by a reduction in Capital Gains Tax personal allowances and increases in the rates. Those are almost certain to be implemented.
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. If you don’t have an advisor, the Personal Tax Team at Henderson Loggie can give you this advice.
The Business Recovery and Insolvency Team can assist by carrying out Members’ Voluntary Liquidations which is generally a tax-efficient way of extracting value from a business in which Business Asset Disposal Relief can be claimed where eligible.