Tax update: Could this be the end for Entrepreneurs’ Relief?

Published: Wednesday 8 January 2020

If Labour had succeeded in winning the General Election last month, the answer would almost certainly have been YES as they had pledged to abolish entrepreneurs’ relief (ER) in its entirety. With a Conservative majority government, however, the future fate of ER is less clear.

ER can be a very valuable tax relief, reducing the amount of capital gains tax (CGT) on a disposal of qualifying business assets (including shares), providing a tax rate of 10% (compared to the 20% standard CGT rate) and a maximum lifetime saving (per individual) of £1 million.

The Tory manifesto stated that they would ‘review and reform’ ER but it does not say when, how or what they will look to do. As the manifesto also suggests that the relief in its current form has not delivered on its objectives, some fairly significant changes cannot be ruled out. Some possible ways in which the government may look to reform could include:

  • A reduction in the lifetime allowance – this currently stands at £10 million of qualifying capital gains per individual.  We could conceivably see this halving to £5 million but would be surprised if it was to go as low as the £1 million limit when first introduced in 2008.
  • Qualifying criteria – with a tightening of the rules in the last Budget, further tweaks and/or additional tests to be satisfied seems like a high possibility.
  • Extension of qualifying period – this was amended to two years in the last Budget, so we think it is relatively unlikely that this will be extended further.
  • A restriction of the qualifying trades – the government could look to restrict the trades to which ER is available on.  Similar restrictions apply for enterprise management incentive share schemes and the enterprise investment scheme, so a similar ‘qualifying trade’ could be imposed for ER to reduce the number of businesses which are eligible.
  • Abolish altogether – the most extreme option would be to abolish ER altogether and introduce something completely new to incentivise entrepreneurs.  We think that this is unlikely but it cannot be completely ruled out.

We would hope that any proposed changes to this relief are consulted on prior to being introduced, particularly after the unintended consequences of changes to ER announced in Budget 2018 which subsequently had to be amended at the very last minute. As this is a transactional tax, however, the government may again look to introduce any changes with immediate effect to avoid people undertaking tax planning in any transitional period.

If you are in the process of selling your business or looking to do so in the near future, please do get in touch. With the next Budget date now set for Wednesday 11 March it may be worthwhile considering options available prior to this date including acceleration of disposals or the possibility of crystallising tax relief in advance of any changes.

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Nick Haines
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