Insight

Act now to make the most of Entrepreneurs’ Relief

Insight

Entrepreneurs’ Relief (ER) – How long will it last?

There’s been much uncertainty lately for property business owners, with a General Election and three and a half years of Brexit debate. A Labour Government was likely to scrap ER but with the Conservatives back in power we will see what they now decide. There’s certainly pressure on them to promote a fair tax system so ER will definitely be looked at.

If you are considering selling your property business you might want to consider accelerating due to uncertainty over the future of ER.

What is the background to Entrepreneurs’ Relief?

Introduced by Labour under Gordon Brown in 2008 as the successor to Business Asset Taper Relief ER was designed to deliver a sustainable and straightforward system, internationally competitive and providing a tax relief for entrepreneurs.

It was designed for, and hoped to encourage, entrepreneurs to invest in and boost the small businesses market.

The relief allows people selling their firm to pay half the normal rate of capital gains tax (CGT), up to a lifetime limit of £10m. At first it only applied to the first £1 million of qualifying gains but that lifetime limit was aggressively expanded by the Conservatives and has been at £10 million since 6 April 2011.

Where are we 11 years on?

Research done last month by the Institute for Fiscal Studies (IFS) seemed to reveal that low rates of CGT have not encouraged entrepreneurs to invest more in UK businesses but have instead provided large tax savings for company owners – not what was originally intended!

Whilst the Treasury had in mind that the relief would cost around £200m per year –  a greater than expected take-up and the increase of the limit has led it to cost more than 10 times that each year.

HMRC recently estimated that the total cost of ER over the first 10 years was a staggering £22 billion.

What’s likely to change?

The Office for Tax Simplification (OTS), an independent advisor to the Government have said the cost of tax relief on ER claims is greater than that of any of the other reliefs considered in their review. It also stated that the ER does not appear to encourage investment in young or growing businesses or preserve existing businesses from break up in the event of succession. Therefore, the OTS says that ER warrants a closer look.

So, whilst successive Governments have been broadly supportive of ER, the OTS comments and the need to look for additional tax revenues suggests that restrictions to ER might be on the horizon.

Pause for thought…

The scrapping of ER would raise what tax business owners pay when they sell up from 10 per cent to as much as 50 per cent. For any business owners hoping to sell now or in the future – think wisely and especially about timing. Who knows how long and to what extent the attractive ER in its current form will be around.

Get in touch

If you are considering selling your business either now or in the future, consider your motivations. Some entrepreneurs are keen and ready to sell their business now whilst they are certain of getting ER. But there are others who are pushing for it to happen quickly because of their concerns over the future and ER.

It is clear that ER and other capital tax reliefs are under review, so it is vital that business owners take advice and plan accordingly.

If you require tax planning advice around ER please do not hesitate to contact me.

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