9 March 2018
Owners of SME trading companies that I talk to about future exit plans usually assume that when it’s time to sell up – then Entrepreneurs Relief will be available and a 10% Capital Gains Tax (CGT) rate will be applied to their gain on disposal.
Their assumption as to the ongoing availability of Entrepreneurs' Relief (and also the opportunity of paying no CGT on exit by using an EOT) usually features heavily in our subsequent conversations.
Entrepreneurs Relief in numbers
The rules on Entrepreneurs' Relief were changed during 2011/2012 - when the individual lifetime limit of relievable gains rose from £2 million to £5 million and then to £10 million during that year.
Since then data from the Office for National Statistics indicate that the number of claimants and the quantum of gains involved with the relief have increased considerably as follows:
| Approx | Gross Gains | Tax Paid | |
| Tax Year | Claimants | £ Billions | £ Billions |
| 2011/2012 | 40,000 | 12.2 | 1.55 |
| 2012/2013 | 37,000 | 12.3 | 1.44 |
| 2013/2014 | 43,000 | 15.9 | 2.01 |
| 2014/2015 | 47,000 | 20.6 | 2.56 |
| 2015/2016 | 52,000 | 25.0 | 3.39 |
The 2016/2017 numbers are due out around October 2018 – but I expect these are likely to show continuing increases in Entrepreneurs Relief being claimed.
The drivers for change
The Conservative government extended Entrepreneurs' Relief from March 2016 so that it also applied to individual external investors in the newly issued shares of unlisted trading companies. Since that date there was the Brexit Referendum result in June 2016 plus the Tories have lost their majority (in the June 2017 General Election) – and are under increasing pressure from a resurgent Labour Party.
The current CGT rates for 2017/2018 are 10% for standard rate taxpayers and 20% for higher rate individuals. These rates are broadly in the same ball park as the 10% Entrepreneurs' Relief rate - and thus its cancellation can be easily justified as 'simplification'.
Furthermore, welcome tax revenues (and political capital around taxing “the privileged better off”) could be generated - at the risk of upsetting only a few thousand individual voters.
Accordingly I would not be surprised if a future government (either Conservative or Labour) decided to significantly alter, or indeed scrap, Entrepreneurs' Relief.
Tax free capital gains using EOTs
Any bad publicity arising from changes to Entrepreneurs' Relief can be deflected by pointing to the zero CGT rate on company disposals available from the introduction of Employee Ownership Trusts (“EOTs”) in September 2014. The EOTs were introduced so that shareholders would be encouraged to establish corporate structures similar to the 'John Lewis' model. Their aim is to facilitate wider employee-ownership – albeit via an indirect holding.
The tax breaks involved with EOTs are significant. In particular the exiting owners of a company incur a zero CGT liability on the disposal of their shares to an EOT.
The ability of an exiting owner to remain 'in-situ' as a Director post disposal (and also to receive commensurate remuneration) means that any 'business driver' or management skills gaps in the remaining workforce can be managed.
UHY are already seeing an upturn in interest on EOTs for exiting shareholders as an alternative to a more traditional MBO. In my view any tinkering with (or removal of) Entrepreneurs' Relief will only accelerate this process.
The next steps
It is always a useful exercise to think about an exit strategy from your business. Please contact a member of our corporate finance team if you wish to explore the options available or to find out more about EOTs.
Alternatively, fill out our contact form here.
Please note that the contents of this article are for general guidance only and no responsibility is accepted for any losses to any person acting (or refraining from acting) as a result of any material herein.
