Is the writing on the wall for entrepreneurs’ relief?
10 February 2020: whispers of reforms to entrepreneurs’ relief in the upcoming Budget have brought out supporters and detractors to the current regime. But what benefits does the controversial relief bring to business? And what good would scrapping it do?
Entrepreneurs’ relief (ER) was introduced in 2008, replacing business asset taper relief and the earlier retirement relief. Broadly, ER allows a taxpayer to access a 10% rate of capital gains tax (CGT) on qualifying gains where they dispose of all or part of their business.
ER has seen a number of changes since its introduction, including progressive increases in the lifetime allowance for gains eligible, from its original £1m to the current £10m threshold.
More revisions were announced as recently as Budget 2018, which increased the length of the minimum qualifying period from 12 months to two years for disposals made on or after 6 April 2019, and introduced two new conditions to the definition of a personal company in respect to disposals made on or after 29 October 2018.
Further changes ahead?
Following on from the Conservative Party’s 2019 election manifesto pledge to “review and reform” ER, speculation is rife that ER will be addressed in the upcoming Budget, which is scheduled for 11 March 2020.
One theory is that the government will abolish ER and replace it with a new CGT relief. Others have suggested that more tweaks will be introduced, such as reducing the lifetime allowance or further tightening the conditions to access the relief.
Either way, given that the cost of ER to the Treasury was £2.7bn in 2017/18, it isn’t surprising that people are speculating.
A balancing act
Whispers of upcoming reforms are likely to bring their share of supporters and detractors. Those who argue ER provides a tax break for the wealthy, particularly given the £10m lifetime allowance currently in place, would undoubtedly welcome a significant reduction in the allowance.
On the other hand, ER’s proponents are unlikely to support any suggestion of its immediate abolition, given the financial planning opportunities it can offer. Some business owners, for example, may be planning to fund their retirement by selling a business built up over many years. The ER savings will reduce the CGT due on the sale and boost their pension pot on exiting their business.
Supporters may also argue that reforming ER too much could send the wrong message to investors as well as small businesses and start-ups.
As ER is also available to venture capital investors, keeping the relief is one way to incentivise investors to remain in the UK and fund small, fast-growing businesses.
Caution against rushed reforms
While the exact nature of any changes is unknown at this stage, it’s clear that more work could be done to improve ER and bring it in line with its intended purpose of supporting and encouraging investment.
For example, research conducted by IFF Research in May 2017 suggested that “in the majority of cases, ER was not the primary motivating factor when customers were making decisions about investing in assets, or disposing of them.”
Certainly the government should seek further input from stakeholders before pushing any further reforms through.
A review into ER should consider all aspects of the relief and whether it is meeting its intended aims. This would include consideration of how ER impacts investment decisions, how it influences growing businesses across the UK, and whether it could be used to encourage investment in specific geographical or business areas.
Ideally, such a review would form part of a wider, more holistic look at business reliefs generally, so that the government can understand whether each relief is achieving its intended purpose and act accordingly.
However, it’s very possible the government will find a figure of £2.7bn too enticing to resist, and may rush through ER reforms designed to save as much money as quickly as possible.
Whatever the government decides, we’ll find out come 11 March 2020.