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Spring Budget 2020: Entrepreneurs’ Relief lifetime allowance slashed

Entrepreneurs’ Relief provides for a 10% rate of Capital Gains Tax instead of 20% when business owners dispose of all or part of their business and certain conditions are met. 

The Entrepreneurs’ Relief lifetime limit for qualifying gains has today been reduced from £10m to £1m. Business owners who expect to make a gain of more than £1m on the sale of their business will be worse off as a result of this change, as will some who entered planning arrangements before Budget day.

About the author

Tony Dillow

+44 (0)20 7710 0388
dillowt@buzzacott.co.uk

The Entrepreneurs’ Relief lifetime limit for qualifying gains has today been reduced from £10m to £1m. Business owners who expect to make a gain of more than £1m on the sale of their business will be worse off as a result of this change, as will some who entered planning arrangements before Budget day.

This has come into effect from the date of the budget, 11 March 2020, meaning there is no time for owners to plan ahead of a future change. However, certain disposals made before 11 March 2020 will also be caught in order to counteract recent tax planning arrangements including:

  1. Unconditional contracts entered into before 11 March 2020 completed on or after that date unless there was no tax advantage motive and, if between connected persons, the contract was for wholly commercial reasons; and
  2. Where both companies party to a share for share exchange are controlled by substantially the same persons before and after the exchange and these shareholders choose to elect out of the no disposal capital gains tax treatment to utilise any unused lifetime limit up to £10m.

All transactions entered into with a view to crystallising Entrepreneurs’ Relief before Budget day should be reviewed to establish whether they will be caught by the new rules and entrepreneurs should reconsider their plans for future disposals. The government have also said there will be measures to unwind any tax avoidance with any ‘clever’ schemes. 

The positive side is that there were rumours that the Entrepreneurs’ Relief would be completely abandoned; however, with £1m lifetime allowance remaining there is still a benefit even if reduced. This is especially true for companies with multiple founders/shareholders, for example, a business with four founders would still get £4m of cumulative relief, meaning that on a £10m exit the lost tax relief is only £600k (£6m over the limit multiplied by 10%).

While a blow to entrepreneurs, the differential is not as big as it once was, with Capital Gains Tax remaining at a 20% rate. However, maximising value on exit can still help to counteract the impact of the reduced tax benefit; for example a 10% increase in the exit price for businesses will help counteract the value lost through the reduction in tax relief.

Read more on the Budget here.

About the author

Andy Hodgetts

+44 (0) 20 7710 2622
hodgettsa@buzzacott.co.uk
LinkedIn

This has come into effect from the date of the budget, 11 March 2020, meaning there is no time for owners to plan ahead of a future change. However, certain disposals made before 11 March 2020 will also be caught in order to counteract recent tax planning arrangements including:

  1. Unconditional contracts entered into before 11 March 2020 completed on or after that date unless there was no tax advantage motive and, if between connected persons, the contract was for wholly commercial reasons; and
  2. Where both companies party to a share for share exchange are controlled by substantially the same persons before and after the exchange and these shareholders choose to elect out of the no disposal capital gains tax treatment to utilise any unused lifetime limit up to £10m.

All transactions entered into with a view to crystallising Entrepreneurs’ Relief before Budget day should be reviewed to establish whether they will be caught by the new rules and entrepreneurs should reconsider their plans for future disposals. The government have also said there will be measures to unwind any tax avoidance with any ‘clever’ schemes. 

The positive side is that there were rumours that the Entrepreneurs’ Relief would be completely abandoned; however, with £1m lifetime allowance remaining there is still a benefit even if reduced. This is especially true for companies with multiple founders/shareholders, for example, a business with four founders would still get £4m of cumulative relief, meaning that on a £10m exit the lost tax relief is only £600k (£6m over the limit multiplied by 10%).

While a blow to entrepreneurs, the differential is not as big as it once was, with Capital Gains Tax remaining at a 20% rate. However, maximising value on exit can still help to counteract the impact of the reduced tax benefit; for example a 10% increase in the exit price for businesses will help counteract the value lost through the reduction in tax relief.

Read more on the Budget here.

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