By Jennifer Moore, Associate Director and head of corporate at Leonard Curtis Legal, part of Leonard Curtis Business Solutions Group
This week’s Budget announcement saw the entrepreneurs’ relief lifetime allowance cut from £10million to £1million per person – securing £6billion for the public finances over the next five years.
Where applicable, entrepreneurs’ relief from UK capital gains reduces the rate of tax payable on gains made on shares to 10% making it a popular tax relief for individuals.
Introduced in 2008 with the aim of incentivising individuals to grow businesses, the scheme has attracted much criticism over the years, primarily for the unintended side effect of motivating those it wasn’t intended to, to pay themselves through a company, and reduce taxation on their earnings.
In the Treasury’s view it has become “expensive, ineffective and unfair,” as well as having done little to incentivise genuine entrepreneurial activity.
A partial reprieve
Despite widespread rumours that the relief would be abolished completely, the Chancellor instead opted to reduce the lifetime cap in line with recommendations from the Federation of Small Businesses.
The Chancellor justified the change by underlining that, under the previous framework, three quarters of the relief went to just five thousand, very affluent taxpayers and that 80% of those looking to utilise the relief would be unaffected. Although the reduction from £10 million to £1million is significant, most would agree the cap is still fairly generous!
This approach has ensured that the vast majority of investors and business owners – particularly in the SME sector –can continue to enjoy the benefit of entrepreneurs’ relief and that the UK remains an attractive market for start-ups and investors.
The changes will apply immediately for disposals made on or after 11th March 2020, with special provisions for disposals entered into before this date that have not yet been completed.
Seeking professional advice
The reduction will, of course, have implications on how business owners and investors forecast their long-term investment and exit strategies. Not seeking appropriate legal and financial advice in line with such changes can – and often does – prove costly. Individuals hoping to benefit from the relief should carefully consider their position before selling their shares. Previous plans should be reviewed and in some cases it will be necessary for changes to be made and new strategies to be put into place.
Entrepreneurs’ relief is generally an area that can be full of pitfalls and those looking to rely on it need to ensure their circumstances and share structures meet all the requirements. The most common issues we see are around the requirement to have held 5% or more of nominal issued share capital and 5% of voting share capital for a minimum of two years but with appropriate and timely advice this can be rectified in most cases.
At Leonard Curtis Legal, we’re already working with business owners to navigate the latest change alongside the existing requirements of entrepreneurs’ relief.
Our corporate team is reviewing current positions, identifying any problem areas that may affect eligibility for entrepreneurs’ relief and making recommendations to help ensure that clients fall within the requirements where possible. At Leonard Curtis Legal our experienced corporate team is able to support clients through this process with a commercial and cost effective approach.
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