Budget 2020: Entrepreneurs’ relief lifetime limit cut to fund other key business tax breaks
11 March 2020: the Chancellor announced he will continue to use the tax system to support genuine risk-taking and creativity where it is proven to be effective.
However, following significant lobbying the government considers entrepreneurs’ relief has primarily benefited a small number of very affluent taxpayers and has done little to generate additional entrepreneurial activity. The government is therefore reducing the lifetime limit on gains from £10m to £1m. This will apply to all disposals made on or after 11 March 2020.
This measure is anticipated to raise over £6.3bn for the Exchequer by 2025 and, according to analysis, only affects 20% of business owners with the remaining 80% being able to benefit in full at the reduced cap.
The Chancellor has also included some provisions to counter certain forestalling arrangements which seek to ‘lock-in’ the previous £10m lifetime allowance. In certain cases parties to the disposal will be required to demonstrate that the transaction was entered into for wholly commercial purposes and was not entered into for the purposes of obtaining a capital gains tax advantage.
Recognising the need for innovation and enterprise to sustain prosperity in the economy, the Chancellor confirmed that the savings obtained through the entrepreneur’s relief reform will be used to fund three other significant tax breaks for businesses:
- An increase in the research and development expenditure credit (RDEC) from 12% to 13% from 1 April 2020
This measure will enable many companies to claim a larger corporation tax deduction for relevant research and development spend
- Increase in the maximum employment allowance by £1,000 to £4,000 from April 2020
This measure supports businesses by providing relief of up to £4,000 on their employer’s secondary Class 1 National Insurance contributions (NIC) liabilities. This is expected to reduce around a further 65,000 businesses’ NIC bill to zero. This should also assist small, growing enterprises to take on staff without incurring additional NIC liabilities.
- Increase in structures and buildings allowance (SBA) from 2% to 3%
From 1 April 2020 (or 6 April 2020 for unincorporated entities) businesses will be able to claim a 3% deduction on qualifying expenditure. This increased rate will apply to both existing qualifying structures brought into use on or after 29 October 2018 and any new additions.
Although, not a specific ‘tax-break’ at this point, the government also confirmed that it would undertake a review of the enterprise management incentive (EMI) scheme. This review will try to ensure the scheme provides support for high-growth companies to recruit and retain the best talent so they can scale up effectively, and examine whether more companies should be able to access the scheme.
The Tax Faculty welcomes the increase in tax reliefs which are utilised by many businesses. With uncertain economic times ahead the employment allowance changes in particular will support smaller businesses in managing cash flow.