It has been widely reported in the financial press that the Chancellor will heavily restrict or even abolish Entrepreneurs’ Relief (‘ER’) in the Budget on 11 March 2020.
ER is a Capital Gains Tax (‘CGT’) relief reducing the rate of CGT from 20% to 10% on disposals of certain business assets. In order to qualify, a person must sell or dispose of an interest in a trading business in which they have more than a 5% interest, the person must have owned the business assets for more than two years prior to the disposal, and there is a lifetime allowance of £10m of gains per person (£20m for spouses).
ER is generous to entrepreneurs who have established successful businesses and who are seeking to exit. However the tax breaks amount to some £2.4bn a year so restricting the relief is an easy target for the Chancellor when the Conservatives have pledged not to raise taxes.
Entrepreneurs and business owners should take steps before 11 March 2020 to lock in ER under the current regime. Some possibilities to save up to £2m of tax are:
1. sell or gift interests in trading businesses before 11 March. The sale could be to a third party or to a family trust on an arm’s length basis;
2. enter into unconditional contracts to sell trading businesses before 11 March; or
3. settle business assets into a family trust before 11 March. If the shares qualify for Business Property Relief (”BPR”) there should be no Inheritance Tax.
There is an interaction between ER and Inheritance Tax so specialist advice should always be sought. Furthermore whether transfers of businesses assets are permitted will depend on the articles of association of the company or any shareholders’ or partnership agreement.
It is also currently possible for individuals to claim Investors’ Relief (”IR”). IR works in a similar way to ER by reducing the rate of CGT to 10% where an individual has subscribed for newly issued ordinary shares in an unlisted trading company after 17 March 2016, and they have held the shares for more than three years before disposal. Unlike ER, there is no requirement for the individual to be an officer or employee of the company, and no requirement for them to hold more than 5% of the share capital. There is no guarantee IR will survive the Budget either. However, there is some limited scope to claim both ER and IR before then.
Our Private Client and Corporate teams work closely together to advise on the tax and other issues which arise when a founder exits a business. Do contact us to lock in significant tax savings before 11 March.