There is mounting speculation about the promised ‘review and reform’ of Entrepreneurs’ Relief (ER) in advance of the Chancellor’s Budget announcement on 11 March 2020. Although there is no certainty of what will happen, entrepreneurs keen to take advantage of the current regime may want to consider their position and look at potential ways to protect their current entitlement to tax relief.
Entrepreneurs’ relief gives a 10% tax rate on gains on sales of businesses and certain assets up to a lifetime cap of £10 million and is popular with entrepreneurs.
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However, there is a question mark on whether the best way to incentivise the creation and growth of new businesses, which is undoubtedly beneficial to the economy, is a relief at the end of the business cycle. There is a view that if the relief is being paid at the end of the business cycle, it is being paid to those who are already rich and successful in their careers.
If ER is reformed, then it is possible that changes may take effect in the next tax year, although there is a worry that the changes will take effect on the day of the Budget announcement.
Unfortunately it is not clear whether any changes will be merely cosmetic, or will comprise a big reduction in the £10 million lifetime allowance. We might even be looking at a total reform of the relief so that it is refocused on helping start-ups and SMEs.
If you are hoping to benefit from ER in the near future or if the relief might form a key part of your exit strategy, you may want to consider bringing forward any business sales currently underway to a date before 11 March 2020. The date of disposal for capital gains tax purposes is the date that unconditional contracts are entered into, not the date the transaction is completed. For the same reason if you are liquidating your business you may want to secure liquidation receipts before the Budget announcement.
There are ways to “bank” the relief, and for each of these there will be a range of other factors to consider including other capital taxes such as Inheritance tax. However in suitable circumstances, triggering a disposal to preserve the relief may deliver a potentially lower overall tax cost than in the scenario where ER is seriously curtailed.
Any ER changes could also affect those who have sold out in earlier years but took part of their consideration in loan notes and acquirer shares. If you have transacted on the basis that the ER conditions will continue be available for loan note redemption into the future, there is now a doubt as to the extent of future relief. For example a loan note holder who received notes on a 2017/18 exit only has until 31 January 2020 to decide on whether to make an election under TCGA 1992 S169Q or S169R. Taxpayers who have not made these elections, on the basis of an expectation of continuing ER qualification may now be feeling less certain in the light of Budget speculation.
If you are unsure of your status and how the potential changes could affect you, contact us and we can review the facts of your case and give you specific advice.