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  • Budget 2020: “Boris, I shrunk the relief…”

    12 March 2020

    Andy Wood



    The 80’s film ‘Honey, I shrunk the kids’ starring Rick Moranis (whatever happened to him?) told the story of a scientist father of a teenage girl and boy who accidentally shrinks his kids to the size of ants.


    In Budget terms we would have ‘hard working ants’ and the scientist father would have tax relief thrown at him through the R&D scheme and Patent Box.


    However, the entrepreneurial friend who had invested in the business to market Moranis’ character’s shrink ray would be choking on his [insert 80’s breakfast] this morning.


    Why so? Yesterday’s announcement that Entrepreneurs’ Relief (“ER”) would be shrivelled up.


    Expensive and pointless?


    The rationale for yesterday’s measures seemed convincing – the relief costs too much and entrepreneur’s behaviour is not affected by the relief.


    Now, our view is that the relief is significantly cheaper than taper relief, which it replaced. However, if it does not do what it is supposed to do (less than 1/5 entrepreneurs surveyed by Gov said it influenced their behaviour) then it is arguable that £1 is too much.


    Due to this ‘chatter’, the narrowing of the relief was expected and its complete abolition would not have been a surprise.


    The measures


    The tinkering has been minimal. But the change will mean that ER is a shadow of its former self.


    Primarily, it involves the striking through of the previous £10m limit and being replaced by £1m.


    This is a lifetime limit on the amount of chargeable gains that benefit from the relief. As such, if someone has already benefited from ER on £1m of gains then he or she is maxed out on the relief.


    Retrospective anti-forestalling


    The provisions also include what are described as ‘anti-forestalling’ methods.


    These are thrown in to the mix because the rumour mill was in overdrive before the Budget and some taxpayers simply gambled that reliefs may be removed and took steps to secure relief.


    The two main pre-Budget routes of doing this were:


    • Entering in to contracts before Budget day but completing sometime in the future; and
    • The use of share exchanges


    It seems fairly irrelevant to go in to these mechanisms now. But the legislation deals with these as follows:


    “[Arrangements entered in to before Budget Day]… will be subject to the £1m cap unless:


    1. The parties to the contract demonstrate that they did not enter into the contract with a purpose of obtaining a tax advantage by reason of the timing rule in section 28 of the Taxation of Chargeable Gains Act 1992, and

    2. Where the parties to the contract are connected, that the contract was entered into for wholly commercial reasons.”


    This deals with deferred contracts.

    “In addition, where shares have been exchanged for those in another company on or after 6 April 2019 but before 11 March 2020, and

    • both companies are owned or controlled by substantially the same persons, or
    • persons who held shares in company A hold a greater percentage of shares in company B than they did in company A and, on 11 March 2020, the personal company test, the trading company and the employee/officer test are met in respect of company B,

    Then if an election is made under section 169Q of the Taxation of Chargeable Gains Act 1992 on or after 11 March 2020, the share disposal is to be treated as taking place at the time of the election for Entrepreneurs’ Relief purposes, meaning that the new lifetime limit of £1 million will apply.”


    This deals with share exchanges.


    The equivalent might have been the (usual) mooted change in the pension tax rules. Say, the rumour was they were going to limit tax reliefto 20%. A higher rate taxpayer had the nous and the means to make a large contribution to benefit from the relief before the Budget. However, rather than just reduce the rate going forwards, ‘anti-forestalling’ rules are brought in to punish the behaviour of that taxpayer and remove the relief.


    This is unfair and isn’t the way that anti-forestalling rules usually apply.


    Usually, we would see the announcement on 11 March that the new ER rules would apply from 6 April 2020. However, to prevent more contrived methods to ‘bank’ additional reliefs, anti-forestalling measures would apply in the interim period.


    These measures are retrospective.


    They clearly increase the tax burden on transactions entered in to before the changes were announced.


    Retrospective legislation should not be used in this kind of area.


    How much will this save?


    The notes suggest that this will take 58% of previously eligible capital gains outside of ER and will more than half the cost of ER going forward.


    But does this take in to account the change in vendor’s behaviour?


    Most individuals selling a business feel 10% is the ‘right’ amount of tax and are happy to pay this. It will be interesting to see whether the removal of the relief persuades vendors to look at other ways of reducing a tax liability on sale.



    If you have any queries about Entrepreneurs Relief, the Budget, or tax in general then please get in touch.