As part of the Chancellor’s Spring Statement in March, further details were put forward regarding the planned changes to entrepreneurs’ relief (ER), which were previously announced in the November Budget last year.
What Is Entrepreneurs’ Relief?
Whether they no longer have time to manage the business, or they simply wish to move on to other projects, there are numerous reasons why entrepreneurs choose to sell or give away their business. Whatever the reason, they may benefit from entrepreneurs’ relief, which allows entrepreneurs who are selling or giving away their business, to do so at a reduced tax rate.
Claiming entrepreneurs’ relief means that an entrepreneur may be able to pay less Capital Gains Tax when selling or giving away all or part their business. They will essentially gain a tax relief at a reduced rate of 10%, which is available for up to £10 million in lifetime gains.
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Why Are the Changes Needed?
Under the current regime, first introduced in 2008, there’s a chance that entrepreneurs will lose their entitlement to the relief. This is because if any individual’s personal stake in a business falls beneath 5%, they will no longer be entitled to the current 10% rate of capital gains tax.
It’s widely believed that this discourages entrepreneurs from seeking external investment in order to finance the growth of a business, especially when their own shareholding may become diluted. Also, many entrepreneurs may consider exiting their business early in order to retain their entitlement to the relief, instead of continuing to support the business with further investment, or seeking funding, which could see their stake drop below 5%. The current regime can act as a barrier to business growth, which is contradictory to the original intention of ER, to help promote enterprise with the reduced tax rate designed to benefit those have contributed to the growth of a business.
The Planned Changes
As part of the changes, there will be a focus on how ER can be adapted to ensure the original backers of a business won’t lose out, should their shareholdings be diluted as the business grows. Individuals will be allowed to benefit from relief before their personal shareholding drops below the 5% qualifying level as a result of funds raised for commercial purposes by means of an issue of new shares.
They will be able to do this thanks to a proposed mechanism, whereby an individual will be able to elect to crystallise certain capital gains before their holding is diluted. They will then be treated as though they have disposed of their shares and then immediately re-acquired them at market value, before the business issues new shares. The individual can then claim ER on that gain either at the time of election, or on a future disposal of shares.
Allowing ER to be retained after a business raises external investment, will not only help support growing businesses, it will also encourage entrepreneurs to stick around and remain involved with the business.
The announced changes to entrepreneurs’ relief have been universally praised and welcomed by many, including tax advisers and business leaders. It’s predicted that these changes will have a positive impact on many small and growing businesses, and will help to further fuel post-Brexit entrepreneurialism.