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What a relief

Changes announced in the Budget means that entrepreneurs’ relief has been scaled back with immediate effect.

Despite widespread fears that entrepreneurs’ relief would be scrapped, the relief has received a reprieve but with the benefit significantly scaled back by way of the lifetime limit on qualifying capital gains on which entrepreneurs’ relief can be claimed being reduced from £10 million to £1 million.

Entrepreneurs’ relief is a tax relief that applies to the sale of certain qualifying business assets and which operates so as to apply a rate of Capital Gains Tax of 10% on gains up to the relevant lifetime limit.

The impact of the changes announced in the budget and coming into effect in relation to disposals on or after 11 March 2020 are summarised in the table below.

 

Gain

Tax

Pre 11 March 2020

Tax

From 11 March 2020

Increase

Effective Rate

£1,000,000

£100,000

£100,000

£0

10.00%

£2,000,000

£200,000

£300,000

£100,000

15.00%

£3,000,000

£300,000

£500,000

£200,000

16.67%

£4,000,000

£400,000

£700,000

£300,000

17.50%

£5,000,000

£500,000

£900,000

£400,000

18.00%

£6,000,000

£600,000

£1,100,000

£500,000

18.33%

£7,000,000

£700,000

£1,300,000

£600,000

18.57%

£8,000,000

£800,000

£1,500,000

£700,000

18.75%

£9,000,000

£900,000

£1,700,000

£800,000

18.89%

£10,000,000

£1,000,000

£1,900,000

£900,000

19.00%

In simple terms, for business owners who sell their business for a gain in excess of £1 million, they will pay an extra 10% tax on any gain over £1 million and up to £10 million (and the greatest proportional increase in tax is where the gain is between £1 million and £2 million).

It is important to note that the new £1 million lifetime limit includes gains on which entrepreneurs’ relief has been claimed prior to the changes so someone who has claimed entrepreneurs’ relief in the past (when the limit was £10 million) will have these gains taken into account on any post 10 March 2020 gains and may find they have already used up the limit.

So, for those owners holding businesses or shares in trading company or groups with a value in excess of £1 million, what are their options?

In the short term sellers may look to pass on all or part of the increased cost to the buyer by way of seeking a higher sale price to compensate for the additional tax – whether that will be possible will depend upon market forces and the relatively bargaining strength of the parties.

But what about where a commensurate increase in price is not possible?

One potential approach could be to look at maximising/topping up pension contributions pre-sale. This may, however, be of limited benefit in some cases given the annual allowance restriction of £40,000 for those with earnings up to £200,000 ££240,000 including the pension contribution) (reducing to £4,000 for those earning in excess of £300,000).

What we are more likely to see in family owned businesses, and given the independent taxation of spouses so that each spouse has their own £1 million lifetime limit for entrepreneurs’ relief, are steps to ensure that full use is made of each spouse’s £1 million limit doubling up the available relief for couples to £2 million of gains.

It is however imperative that advice is sought before transferring or issuing shares to spouses to other family members in order to:

  1. assess whether such proposals are permitted under the terms of the company’s articles and/or any shareholder/investment agreement;
  2. assess what (if any) tax charges may arise on the transfer/issue of shares;
  3. ensure that the arrangements will be effective and achieve the desired purpose bearing in mind all the relevant requirements for entrepreneurs’ relief including the requirement for the spouse to hold the shares and be an officer or employee for 2 years prior to any sale (see our previous update on entrepreneurs’ relief); and
  4. d) consider the wider practical implications of giving shares to spouses or other family members.

For third party investors, the use of the EIS scheme or investors relief (which, like entrepreneurs’ relief, reduces the tax on the gain to 10% but has not had a corresponding reduction in the £10 million lifetime limit) remain possibilities. 

By combining tax, corporate, private client and employment lawyers within one integrated service Weightmans can help you put in place ownership structures that align your personal motivations ad plans alongside the operation needs of the business – see our brochure Plan, Protect, Prosper for more information.

If you have any questions about the impact of the budget changes or would like to review your shareholdings/structure please contact Haydn Rogan, Partner on 0161 214 0517 or email haydn.rogan@weightmans.com.

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