10 October 2018
Entrepreneurs’ Relief is one of the most generous tax reliefs currently available and has regularly been tipped for reform in successive budgets in recent years.
The relief, which will cost the Treasury around £2.7 billion in 2018, has been labelled ‘expensive, ineffective and regressive’ by the Resolution Foundation, an independent think tank that suggests that the money could be better spent funding part of the additional £20 billion spending increase pledged for the NHS.
Introduced in a hurry in 2008 following protests over the abolition of the Business Asset Taper Relief, the relief was initially much less generous. It allowed an individual who was exiting a business to achieve a 10% tax rate on the first £1 million of gain and was expected to cost the Treasury around £200 million in its first year. In its current format, today’s entrepreneurs can have their 10% tax rate on gains of up to £10 million. This represents a huge extension to the relief in its ten-year lifetime.
People who are able to claim the relief come from a relatively small pool. In 2015/16 there were only 52,000 claimants. 82% of claimants are male with a typical age of 57. These figures show that this is not the most inclusive relief.
There has never been a full evaluation of the effect of Entrepreneurs’ Relief and it is unclear whether it influences behaviour amongst entrepreneurs either when setting up their businesses or on a sale. Nor is there any evidence that it encourages entrepreneurship.
This being said, it is still a very valuable relief to those of our clients who qualify.
So, is Entrepreneurs’ Relief fit for purpose and will it survive the 2018 budget unscathed?
Given the precarious position of the current Tory Government and the uproar caused by the removal of the Business Asset Taper Relief in 2008, I would be surprised if Entrepreneurs’ Relief were to be abolished completely. However, there could be some tinkering with the existing rules.
The 12-month required ownership period seems particularly generous, and this may be extended to try and encourage more long-term investment in entrepreneurial ventures. The personal shareholding requirement might be another area which could be targeted. At present, this is relatively low at 5% and means that even minority shareholders can claim the relief. Another area which could be targeted is the percentage of a company’s activities which need to be trading for that company’s shares to qualify for Entrepreneurs’ Relief. Currently, HMRC hold the view that at least 80% of the activities need to be trading but this is not legislated for. Will the government legislate for this limit and how it should be calculated? Will they increase the percentage to restrict the availability of Entrepreneurs’ Relief further?
Even if changes to Entrepreneurs’ Relief are introduced it will still be a very valuable relief for our Owner Managed Business clients and it is important to seek advice as to the availability of the relief well in advance to ensure all the relevant requirements are met at the date of sale.
If you think any of the above may be applicable to you, please do not hesitate to contact your local UHY specialist to discuss your options.
Alternatively, fill out our contact form here.