What next for Entrepreneurs’ Relief after Budget changes?
Quite rightly a lot of the attention paid to the Chancellor’s Budget statement on March 11 focused on the help he was giving to people and businesses to help them combat the impact of coronavirus.
Small businesses and the self-employed in particular could be facing severe cashflow problems as supply chains are disrupted and self-isolation starts having an impact, so he clearly needed to devote a large part of his speech to that area.
In a way therefore the tax measures announced have almost fallen off the radar and have not attracted much attention so far.
One relief that had been widely tipped as being likely for the chop was Entrepreneurs’ Relief, which reduces the amount of Capital Gains Tax paid on disposals of qualifying businesses, of shares in a personal company and of shares from an Enterprise Management Incentive Scheme.
Press speculation in late January and early February that the whole relief was about to be abolished altogether resulted in a flood of enquiries to firms such as our own from people looking to sell up while the relief was still available.
The logic behind an abolition was that the relief was too successful, that it was costing the Exchequer huge sums of money and rules were being abused, with artificial structures being created to take advantage of them.
There have indeed been some changes announced to the relief, but they fall short of its complete removal.
Under the rules in place before the Budget, Capital Gains Tax is paid at 10% on claims up to a lifetime limit of £10m worth of qualifying gains.
From disposals on or after Budget Day, the amount of lifetime gains that qualify for Entrepreneurs’ Relief will reduce from £10m to £1m. So if a person disposes of a qualifying personal company on or after that date with gains of say £3m, and that person is a higher-rate taxpayer and has not previously claimed Entrepreneurs’ Relief, then the first £1m of chargeable gains will be eligible for the 10% tax rate, but the remaining £2m will be liable to tax at 20%, subject to deduction of any annual exemption available.
Needless to say there will be some fairly lengthy transitional rules in place to cover situations where somebody is partway through a disposal.
Almost all are designed to prevent perceived abuse of these new rules and to stop the old, more generous, relief still applying.
This often involved what HMRC is calling ‘forestalling arrangements’. A first read through the draft legislation designed to counteract these forestalling arrangements suggests that the proposed measures go much further than might seem to be necessary and that transactions undertaken well before the Budget Day may also be caught by the lower limit.
Yet again the previously well-established principle of changes in taxation not being retrospective has been overridden.
Given the size of the government’s majority in parliament, I would think that it is very likely that in the absence of a concerted campaign by taxpayers and MPs, then the legislation is likely to be passed as drafted, with some potentially unintended consequences. Watch this space.
Author: Mike Lea, Managing Partner, PKF Francis Clark, Bristol
Tel: 0117 403 9800