What is Entrepreneurs’ Relief and How could it Impact Business Sellers?
Last week’s headlines were dominated by the topic of Entrepreneurs’ Tax Relief (ER) and how the government’s new budget could alter the way this works. We’ve summarised exactly what ER is and how the new rules could affect all entrepreneurs looking to sell their business.
Author: Ms Katy Jones
What is Entrepreneur Relief?
Introduced by Gordon Brown’s Labour Government in 2008, the scheme was brought in to encourage people to start their own businesses and essentially boost the economy, whilst also replacing Retirement Relief. Reducing Capital Gains Tax from 20% to 10% on the first £10m when selling a business, the idea is that the initiative saves tax to be reinvested into a new venture. To be eligible for ER, for at least two years up to the date you sell your business, you must be a sole trader or business partner and have owned the business for at least 2 years.
Why is ER under attack?
As many business owners use the revenue from their business sale to fund their retirement, the money isn’t necessarily fuelled back into the economy, therefore overlooking the purpose of the scheme. To evidence this, there’s no clear data that supports ER is directly responsible for generating extra businesses and jobs to sufficiently justify its cost to HMRC.
Additionally, an argument has arisen that the tax break has been exploited by those working on a freelance or contract basis, making it possible to run income through their owned business and take money out in a more tax efficient manner.
As there is no limit to how many times ER can be claimed, not exceeding £10m, it’s been argued that the system can be easily exploited. However rather than scrapping the scheme completely, tightening the rules to prevent such exploitation would perhaps be a better option, as it does offer a great incentive to potential entrepreneurs to embark on the daunting journey that is starting a business.
What are the potential changes for 2020?
It’s highly likely that changes to ER will now arise, potentially as soon as when the new budget will be read in parliament on Wednesday 11th March. There have been whispers that the relief will be dropped completely, however it’s yet to be confirmed. At present, all we know is that the budget will outline tax rates and policies for the new tax year commencing 6th April, and possibly introduce ‘anti-forestalling’ provisions which will prevent those eligible from taking advantage of current policies before a change in the law follows.
How could this effect entrepreneurs?
It seems that the days to take advantage of ER could be numbered, therefore if you are thinking about selling, operator as a contractor or have money sitting in your business, now would be the time to take action. Depending on your situation, you could delay paying Capital Gains Tax through Rollover Relief, which involves re-investing in new business assets. Alternative you could tap into Hold-over Relief, where assets are transferred to a spouse or civil partner rather than sold.
We at Intelligent suggest the best way forward would be talking to your accountant for professional advice on the various tax options available to you. If you are ready to sell, you can always give us a call on 0800 612 7718 or email email@example.com to find out more about our service schedule a professional business valuation.