Entrepreneurs Relief in the firing line?

by Simon Martin

The lead up to every budget in recent times has seemingly been accompanied by speculation and rumours regarding the future of Entrepreneurs Relief. In the run up to the first budget of the 2020s there are more clear signs than ever before that this Relief is firmly in the Government’s cross hairs.

The Conservative manifesto for the December 2019 election included the line “We also have to recognise that some measures haven’t fully delivered on their objectives. So we will review and reform Entrepreneurs Relief”.

At present, Entrepreneurs Relief allows owners, meeting certain criteria to pay tax on the sale of their business at 10%. Given that it is possible that any change to ER will be enacted from midnight on the day of the budget (11 March 2020), there could be considerable implications for owners currently undergoing a sales process.

There are worthy conversations to be had over whether ER really encourages entrepreneurialism directly or whether it achieves this by incentivising succession in the business so that it can advance with fresh impetus, whilst also giving the retiree a windfall which can be spent and put back into the economy. Either way the availability of ER is one of the most common subjects when we begin to assist owners with a business sale.

The HMRC statistics regarding the effective Capital Gains Tax rate paid by individuals in recent years makes interesting reading (for an accountant!). The chart below illustrates the downward trend of the effective rate of CGT in recent periods. Clearly, ER is not the only reason or relief which impacts upon this, but it is a contributor.

Given the debt which the country is burdened with, it is understandable that any Government would need to address this descending path. If this were a financial due diligence assignment on ‘UK Limited’, this is the type of trend which would be a clear red flag.

A breakdown of the data by the bracket of gain declared shows that the slippage in effective rate has occurred across all levels of gain. 

The overall picture is further complicated by the detailed split by the size of the gain declared. In 17/18 there werejust 9,000 gains of over £1m declared but these made up £34bn of the total £55bn of gains. The average reported gain in the £1m+ bracket is therefore around £4m. It is very likely that there are significant gains within this group which will skew the data. Inclusion of a £1m to £2.5m would potentially make the data very interesting.

Even ignoring the potential disparity in the £1m+ category, of the 260,000 people who declared capital gains in 17/18, 251,000 of these declared a gain under £1m. Applying a blanket rate of 20% to all of these gains would have achieved just over £1bn of additional tax in theory (ignoring all other rates, allowances and reliefs). In reality however, it is likely that a number of these gains would not have crystallised due to the shareholders of owner managed businesses deciding to kick the can down the road rather than hand over a larger slice of their paper wealth to the tax man.

This creates a 3 prong impact to the health of the economy – the initial tax gain is not crystallised, the growth of the company (and profits) are more likely to stagnate as the owner aims to maintain status quo, and finally the owner does not have the cash from the company sale in their pocket to purchase their dream car or boat.

Whether this was the original aim of ER or not, the relief has become a useful tool to encourage succession in owner managed businesses. Although we are hopefully not looking at a large hike in CGT to accompany an alteration of ER, as may have happened with a change of Government, it would be disheartening if this group of individuals are forgotten when the restructure of ER does eventually take place.

For advice on business sales, including the availability of Entrepreneurs Relief, please contact Simon Martin.

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Simon Martin

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