With CGT Entrepreneurs’ Relief in the spotlight, business owners are encouraged to plan carefully, or risk losing 1/5 of company value
For many years business owners have come to expect to benefit from the Capital Taxes regime, not least due to Entrepreneurs’ Relief (ER) which can effectively reduce the tax paid on gains from 20% to 10%, securing a very significant CGT saving on the sale of a business.
However, ER has repeatedly come under scrutiny in recent years, with pressure mounting to abolish it entirely. Statistics released by HMRC reveal that 9,000 people paid £5.1bn in tax on £33.7bn of capital gains in the 2017/18 financial year. Whilst this is a considerable sum, the average tax rate is calculated at just 15% – much lower than the 20% basic rate income tax, and fraction of the 40% higher rate income tax.
This discrepancy in the rates of capital and income tax rates has long been questioned, but the stakes have recently soared due to comments made by Sir Edward Troup, a former executive chair of HMRC, who suggested that a large number of the country’s richest are exploiting ER to pay just a paltry 10% tax. He went on to recommend the abolition of ER, saying that “it gave away £2bn every year to those that have already made their gains and provides no incentive for real entrepreneurship”.
In recent months the government has already restricted the availability of ER for business owners by introducing qualifying conditions during the two years prior to the sale of the business – to prevent misuse of this incredibly valuable relief. However, with the general election just weeks away, there are new and louder calls for any new government to axe it entirely.
John Farnsworth, partner and head of corporate finance at Smith Cooper advises “Given the mounting pressure facing ER, business owners would be sensible to start careful planning, and such considerations may mean bringing forward the exit process so as to benefit from ER.
“Its loss will mean tax on the gain realised upon sale could double from 10% to 20%, seriously affecting the vast majority of business owners’ expectations of value and the quality of retirement.”
