Business owners who may be contemplating a sale of their business may have been relieved to have avoided a Corbyn led government, which would have abolished Entrepreneurs’ Relief, but should be under no illusion as to whether the relief is set to remain in its current form indefinitely.
With an 11 March Budget looming, entrepreneurs should be aware that the Conservative party manifesto, which expresses strong support and encouragement for entrepreneurship, went on to say “…some measures haven’t fully delivered on their objectives. So we will review and reform Entrepreneurs’ Relief”.
Entrepreneurs’ Relief gives individuals a 10 per cent rate of capital gains tax on lifetime gains of up to £10m raised from business disposals, as long as certain qualifying conditions are met. It is estimated to have relieved around £25bn of tax since its introduction in 2008. Reforms effective since 6 April last year increased the holding period for qualifying shares from one year to two years and made revisions to the minimum 5% shareholding requirements to include a 5% economic interest test too, however it seems clear that the prevailing view is that those reforms did not go far enough.
What business owners should expect, therefore, is further reform (rather than absolute abolition) which could be announced as soon as the forthcoming Budget and be effective from 5 April 2020 (if not from the Budget date itself) and, although pure conjecture at this stage, could go on to include changes to the 5%/2 year holding requirement, or to the 10% relief rate, or changes to the lifetime relief limit which has stood at £10 million since 2011.
The forthcoming Budget is not, as yet, guaranteed to reform the relief and it is possible that the Government may simply announce a review/consultation in the first instance on the basis that the relief is not a loophole, and businesses and their owners have based their plans around it, but it has simply not fully served the purpose for which it was intended.
However, the commitment to reform the relief is in the manifesto, and the reform, when it comes, is likely to see a lessening or tightening, rather than an extension or loosening, of the relief, which is presently estimated to relieve around £2bn p.a. in tax (equivalent to about 1% of GDP).
So, the message to any business owner who is already contemplating a sale is to get on with it, as delay beyond Q1 of 2020 (if not Budget Day itself) risks the sale being taxed differently from the present Entrepreneurs’ Relief regime and in a way that is likely to cost them more.