With an 11 March Budget looming, business owners should be aware that the Conservative party manifesto, which expressed strong support and for entrepreneurship, highlighted that “…some measures haven’t fully delivered on their objectives. So we will review and reform Entrepreneurs’ Relief”.
The relief, which allows individuals to claim a 10 per cent rate of CGT on qualifying business disposals, subject to a lifetime gains limit of £10m, is estimated to have relieved around £25bn of tax since its introduction in 2008. Reforms effective since 6 April last year increased the holding period for qualifying shares from one year to two years and made revisions to the minimum 5% shareholding requirements to include a 5% economic interest test too. There does however appear to be concern that that these reforms did not go far enough.
Specifically, we understand that the Treasury is concerned that entrepreneurs’ relief is presently estimated to relieve around £2bn p.a. in tax (equivalent to about 1% of GDP). We therefore believe that business owners should expect to see further reform of the relief (albeit rather than absolute abolition).
It is unclear whether the Budget on 11 March 2020 will indeed include measures to enact such reforms (it is possible that the Government may instead announce a consultation exercise in the first instance). However, given the manifesto statement and subsequent comments by Boris Johnson, we believe that some level of reform is likely.
In practice our expectation is that this will involve either a lessening of the benefit, or further tightening of the qualifying conditions for the relief – potentially including changes to the 5%/2 year holding requirements, the 10% relief rate or changes to the lifetime limit which has stood at £10 million since 2011.
Our expectation is however that the Treasury will stop short of wholesale abolition of the relief, not least as UK business owners have benefitted from some form of preferential rate of CGT for genuine business disposals for some considerable time.
Whilst we will need to await the Budget for clarity, we would encourage business owners already contemplating a sale or other capital transaction to consider progressing their plans in advance of the 11 March given the risk that delaying beyond Q1 of 2020 (if not Budget Day itself) risks proceeds being taxed differently from the present Entrepreneurs’ Relief regime, and the likelihood of significant additional tax costs.
