There is a lot of talk about ER being scrapped
Our view is that ER will be retained but restricted further
Are your clients concerned about a loss of ER? If so, a solution exists.
Introduction – The Death of Entrepreneurs Relief?
“Reports of my death are greatly exaggerated”
The story goes that this was the text of a cable sent by Mark Twain from London to the US media after his obituary had mistakenly been published. We have heard a lot over the last few months about the death of Entrepreneurs’ Relief (“ER”). Is this attractive relief a victim of the same exaggeration that Twain suffered?
Of course, ER is one of a long line of capital gains tax reliefs targeted at those either retiring or exiting from a business. Most commonly, ER will apply when a business owner sells his or her shares to a third party or family member.
For the qualifying conditions please see here.
The relief is highly attractive as it provides for a 10% effective rate of tax on the relevant gain.
Each person has a lifetime limit which is currently set at £10m [Note, following Budget 2020, this is now restricted to £1m with effect from 11 March 2020].
What’s the problem with ER?
The main problem is cost.
The Resolution Foundation (suggests that ER ‘costs’ the Government £2.7bn per year. This is more than three times the amount that was originally forecast. Other think tanks have also made the same point.
However, this should not be a surprise.
Firstly, the £10m referred to above was originally set at £1m. As such, the maximum benefit one can receive has potentially increased ten-fold.
Secondly, the ‘cost’ of a tax relief is clearly highly sensitive to the headline rate of CGT.
Originally, the 10% rate compared to a top rate of 18%. In the meantime, we have had a top rate of 28% before this fell in 2016 to 20%.
In addition, a further expansion of the relief applies to those who hold shares in their company which employs them (waiving the 5% requirement) under the EMI scheme has also increased the cost of the relief.
The second issue is that recent surveys undertaken by the Government suggest that ER does not influence behaviour to any great extent. So, the verdict appears to be that ER is both expensive and relatively pointless.
This seems pretty damning, doesn’t it?
What is the future of ER?
Both the Labour Party and the Conservatives made it clear that ER would not survive in its current form.
However, it has been clear policy of successive governments that entrepreneurs should pay a lower rate of tax ton a business sale than, say, if an investor sells Banksy’s latest artwork.
I’m not saying whether this is right policy. But it is a fact.
In 2007/08, its last year of operation, business asset taper relief ‘cost’ the Exchequer £7.8bn. Of course, this makes ER look very good value indeed!
If the Government was to abandon an apparently long-standing commitment to those responsible for business growth it would, in my opinion, send a very negative message to business. As such, it is my view that ER will be retained but with the qualifying conditions will be restricted further. This might include a tightening of the definition of personal company and perhaps a lengthening of the period for which one must satisfy the conditions.
A further, obvious change might be to cut the £10m lifetime limit.
Securing ER – is there a solution?
I am not one to try and scare people in to action but those concerned about a loss of ER might consider exploring a ‘friendly’ sale before the Budget.
This can be done relatively simply and was a method used by many when it was announced that taper relief would be scrapped over a decade ago (prior to the announcement that ER would succeed the relief).
The solution might be to sell the shares to another vehicle – for example to a family trust – with the completion of that contract being deferred in to the future.
The exchange of contracts should take place before Budget day. This becomes the reference point for CGT purposes meaning that on completion the sale is deemed to have taken place prior to Budget and with ER being banked.
There should be no cash flow issues here and it should be possible to unwind the arrangement if that becomes desirable in the future.
If you or your clients have any queries about ER, or would like to discuss a solution for securing ER, then please get in touch.