Entrepreneurs’ relief is one of the most valuable reliefs in the capital gains tax system – the sale of a qualifying business can be taxed at a rate of 10 per cent rather than the main CGT rate of 28 per cent, on gains up to a lifetime total of £10m. Full relief is therefore worth up to £1.8m per person. For some time, we have been predicting reductions in the total lifetime limit but could Budget 2016 finally be the moment that entrepreneurs’ relief is cut?
In 2013/14, 43,000 people claimed entrepreneurs’ relief totalling £2.9bn (this was £2bn more than predicted). This may be too costly for the Treasury. Further analysis of the figures shows that £1.8bn of this relief was shared by around 3,000 taxpayers, giving an average tax saving of £600,000.
A consultation ran from December to early February whereby restrictions would come in to prevent profits retained within a company from benefiting from relief on a winding up, meaning that they would be taxed at the new higher dividend rates of up to 38.1 per cent rather than the 10 per cent entrepreneurs’ relief rate. These restrictions also impact on people who intend to remain involved in the business or a new business carrying on a similar trade to the old one. Whilst the results of the consultation have not yet been published as HMRC are currently ‘analysing your feedback’, we expect these restrictions to come into force on 6 April 2016.
Will we, therefore, see further reforms to entrepreneurs’ relief on 16 March? There is speculation that the lifetime limit could be reduced from £10m, to go alongside the restrictions on retained profits and future businesses. The holding period for qualifying assets may increase, thus preventing some individuals from paying tax at the reduced rate.
What might result in a short term revenue rise for the Treasury may have wide-reaching consequences. What would restrictions to relief mean for the funding of small businesses? Will we see fewer serial entrepreneurs? Restricting the relief would undoubtedly have a big impact on businesses which need entrepreneurs’ cash.
For more information please contact Helen Relf or your usual RSM contact.