The Death of Entrepreneurs Relief?

Introduction

"Reports of my death are greatly exaggerated"

The story goes that this was the text of a cable sent by Mark Twain to the US media after his obituary had mistakenly been published.

We've heard a lot over the last few months about the death of Entrepreneurs' Relief ("ER"). Is this attractive relief a victim of the same exaggeration that Twain suffered?

Of course, ER is one of a long line of CGT reliefs targeted at those either retiring or exiting from a business. Most commonly, ER will apply when a business owner sells his or her shares to a third party or family member. The relief is highly attractive as it provides for a 10% effective rate of tax on the relevant gain.

What's the problem?

The main problem is cost.

It has been suggested that ER 'costs' the Government £2.7bn per year which is more than three times the amount originally forecast.

However, this should not be a surprise.

Firstly, the £10m referred to above was originally set at £1m. As such, the maximum benefit one can receive has potentially increased ten-fold.

Secondly, the 'cost' of a tax relief is clearly highly sensitive to the headline rate of CGT. Originally, the 10% rate compared to a top rate of 18%. In the meantime, we have had a top rate of 28% before this fell in 2016 to 20%.

On top of this, there has also been a further expansion of the relief applies to those who hold shares in their company which employs them (waiving the 5% requirement) under the EMI scheme. More cost.

The second issue is that recent surveys undertaken by the Government suggest that ER does not influence behaviour to any great extent.

So, the verdict appears to be pretty damning doesn't it - ER is both expensive and relatively pointless!

The future

Both major parties made it clear that ER was unlikely to survive in its current form.

However, that is against the clear policy of successive governments that entrepreneurs should pay a lower rate of tax on the sale of their business than, say, if an investor selling a David Hockney or Gerhard Richter.

I'm not saying whether this is the right policy. But it is a fact.

Such reliefs have always been expensive. In 2007/08, its last year of operation, business asset taper relief 'cost' the Exchequer £7.8bn. This figure makes ER look like good value.

If the Government was to abandon such a commitment it would send a very negative message to business.

As such, it is my view that ER will be retained but the qualifying conditions will be restricted further. For example, more tightening of the definition of personal company, a lengthening of the qualifying period or a cut to the £10m lifetime limit.

Securing ER - is there a solution?

I'm not one to try and scare people in to action but those concerned about a loss of ER might consider exploring a 'friendly' sale before the Budget (11 March 2020). Such a transfer would enable one to bank ER prior to any changes.

There are a number of ways of achieving this result some of which could be 'unwound' if the Budget passes without adverse changes.