The end to Entrepreneurs’ Relief as we know it? What is anticipated in the 11 March budget?

5th March 2020 Corporate

Over recent weeks concerns have mounted for entrepreneurs following the comments of significant members of the Conservative party ahead of the budget announcement next week. It is widely anticipated that the current Chancellor of the Exchequer, Rishi Sunak, will announce changes to the current structure for Entrepreneurs Relief, if the relief is not scrapped entirely.

What is Entrepreneurs’ Relief?

Entrepreneurs Relief (ER) was introduced in 2008 and (broadly) allows certain individual shareholders in a company to pay 10% Capital Gains Tax (as opposed to current capitals gains tax rate of 20%) on the gains as a result of the sale of qualifying assets, subject to a lifetime allowance of £10m. This is a crucial element of many share/business disposals as it allows the shareholder to receive a significant tax break on a qualifying share/business disposal (provided that the shareholder holds more than 5% of the shares in the company and is an employee or officer of the company).

ER is available where an individual shareholder makes a qualifying disposal of shares in or securities of a trading company or receives a distribution following the transfer of the whole or part of a business, or assets in use on the termination of a business.

What changes are anticipated and when?

The Government are under pressure to raise revenue to fund their spending proposals and it has been extensively reported that that ER is likely to take the hit, with its cost to the Exchequer currently totalling £2.4bn.

Various aspects of the relief may be subject to review, and it is considered likely that such revisions may include:

  1. An increase in the tax rate from 10%
  2. Changes to the qualifying conditions for the relief
  3. A reduction in the lifetime limit of gains from £10m.
  4. The removal of ER in its entirety

In the worst case scenario, it is possible that any changes will be made with immediate effect from 11 March 2020. Those with a more positive outlook hope that any changes will commence at the start of the new tax year on 6 April 2020 or that there will be no immediate changes, with the government committing to a formal review over a set period of time with a view to making changes further down the line.

Further questions arise as to whether the changes will have a knock on effect on share incentives, such as EMI option schemes, which currently benefit from ER as well.

The position is uncertain and with less than 1 week to go until the budget is released, businesses close to a sale may consider taking advice on crystallising a gain now to lock in the 10% rate in anticipation of any changes. Business owners may also see this a good opportunity to discuss acquiring shares from minority/silent shareholders if a price can be agreed quickly.

As a final thought, perhaps the removal of ER in its entirety would lead to other tax advantaged exit structures, such as employee ownership, becoming more attractive to shareholders looking to exit.

What is certain, is that many business owners and professional advisors will be watching the budget next week with a much keener interest than they may have done in the more recent past. What will happen remains to be seen!

This bulletin is intended as guidance only and does not constitute legal advice. If you would like to discuss the available options for your business ahead of the anticipated changes, please contact our Corporate department for further assistance.

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Mark Heppell is a Partner located in Manchester in our Corporate department

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Ruth Pearson is a Trainee Solicitor located in Manchesterin our Trainee Solicitors department

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