Autumn Budget: Is ‘Entrepreneurs’ Relief’ under threat?
Entrepreneurs’ Relief is a Capital Gains Tax (“CGT”) relief which can provide significant savings by way of a reduction in the rate of CGT from 20% to 10% on the sale of a business, shares in a trading company, or certain business assets.
In order to qualify for the relief, there are various conditions which need to be met, which should always be considered to ensure that any pitfalls are avoided and any opportunities maximised.
Whilst the removal or restriction of Entrepreneurs’ Relief is unlikely to be a popular move with existing business owners and aspiring entrepreneurs, there is a growing expectation within the accounting industry that the relief will be attacked as part of the Autumn Budget 2017 measures. Such a change might appeal, for example, to younger generations who feel that wealthy business owners should not benefit from such a generous tax saving measure.
The Government has already introduced “anti-phoenixing” rules which seek to combat business owners abusing the relief by extracting profits by way of liquidation, only to resume the same business (multiple times or even ad infinitum. However, there remains a number of planning opportunities which the Government could look to limit or close.
By way of an example, it would be relatively simple for the Government to amend the legislation further so that the qualifying conditions have to be met for, say, five years (rather than the current one year which generally applies). This would immediately make it more difficult to structure disposals in advance of a sale to secure Entrepreneurs’ Relief.
The Government might also look to increase the personal shareholding requirement; under which a shareholder must currently hold 5% or more of a company to qualify for the relief on sale of those shares. At present this relatively low shareholding requirement presents several opportunities for planning which the Government may feel is hitting their coffers too hard and is too generous for minority shareholders.
HM Revenue & Customs have long held the view that if more than 80% of a company or group’s activities are trading it will be accepted as “trading” for Entrepreneurs’ Relief purposes. However, 80% is not a legislated limit and the question of how to test the 80% is a common one. Might the Government look to legislate further on these points; perhaps setting a threshold in excess of 80%, to limit the availability of the relief?
Business owners, particularly those expecting to liquidate or sell all or part of their business soon, are therefore advised to urgently review their existing arrangements. Individuals that have invested, and were expecting to make use of the relief upon future disposal, will also have a keen interest in developments in this area.