Entrepreneurs’ Relief – down but not out! 

Today the Chancellor dealt a blow to Entrepreneurs’ Relief (ER). This relief has been under the spotlight for some time from various bodies and individuals calling for its abolition, including the ex-Head of HMRC.   

This relief costs the UK Exchequer around £2.4 billion per annum and when this relief was introduced in 2008 it was projected to cost the Treasury £200 million per annum.  Of course, that was when the lifetime limit was initially £1 million of chargeable gains at a 10% capital gains tax rate.  Since then, various Chancellors have tinkered with the relief, in particular, lifting the lifetime limit to £10 million of gains per qualifying individual.

The relief is available to business owners who dispose of their business interests in a range of circumstances, be it as a partner in a business, sole trader or shareholder. The relief can also be available on business assets owned by individuals but used in a business. Trustees can also secure the relief in certain circumstances where the Trust beneficiary has available ER lifetime allowance to claim.   

As of Budget day (11 March 2020), the lifetime limit is reduced back to its original £1 million limit. Gains arising for an individual within this limit will be taxed currently at a 10% capital gains tax rate as opposed to a 20% capital gains tax rate, and individuals who have used more than £1 million of their lifetime ER limit prior to 11 March 2020 will have no further ER limit available going forward. 

For those hedging their bets against the relief disappearing in the run up to the Budget by triggering a disposal in some cases which could have been rolled back had the changes not been announced, the Chancellor has ensured such planning is within anti-forestalling provisions which will see the new £1 million lifetime limit imposed. 

The anti-forestalling provisions within the draft legislation focus on two key areas: 

1. Unconditional contracts entered into pre 11 March 2020 but where the asset isn’t conveyed or transferred until on or after 11 March 2020.   
2. The exchange of securities, by way of a share for share exchange, which can give an individual the opportunity to disapply the tax neutral rules of such a share transfer and instead claim ER. 

These anti-forestalling rules are complex and if in doubt as to whether your transaction is within the higher £10 million limit or the much reduced £1 million limit, then it is possible to apply to HMRC for clearance and at the very least we advise you speak with your tax adviser. 

It’s not all doom and gloom though, ER remains, albeit it has gone back to its original £1 million ‘roots’.  Of course, ER is not the only capital gains tax relief out there for investors in trading companies, the lesser well-known branch of the family is of course, ‘Investors’ Relief’.  This relief came into effect on 6 April 2016, with shares only being able to avail of the relief once they had been held for three years from that date (i.e. 6 April 2019).  

Different conditions apply for this relief to be available, like ER though, there is a lifetime limit of £10 million of gains which obtain a 10% capital gains tax rate.  For external investors looking to invest in a trading company, this relief must be considered and given it is less restrictive than Enterprise Investment Scheme Relief, I predict it will become a much bigger player going forward.