ER, a valuable tax break for entrepreneurs, is reportedly under threat in the March Budget which may accelerate business owners’ sale and retirement strategies, tax planning and the winding up of their companies.
ER was introduced by former Labour Chancellor, Alistair Darling, and is available upon the disposal of qualifying assets, including shares where certain holding criteria are met. Qualifying gains are taxed at a rate of 10% instead of the usual capital gains tax rate of 20%.
The lifetime limit on capital gains eligible for ER has risen from £1 million at the time of the scheme’s inception to £10 million today. Recent research by the Institute for Fiscal Studies suggests that not taxing these capital gains at the full rate of 20% is costing the Treasury £2.4 billion per annum.
The Conservatives pledged to “review and reform” ER as part of their recent election manifesto, saying that the scheme hasn’t “fully delivered on its objectives.” It was originally intended to encourage owner-managers to invest more in their businesses, but evidence suggests this has not had the desired effect. Coupled with the cost to the Treasury, it is clear why the Chancellor has his eye on it.
Some of the changes that are being reported include raising the applicable 10% capital gains tax rate or reducing the £10 million lifetime limit down to £1m. These changes could be effective from as early as April 6 2020.
Any changes that are made to this tax relief could be a significant blow to business owners and will come at the expense of the UK entrepreneurial community. Furthermore, sweeping changes to the relief at this time could harm many business owners’ exit and retirement planning. The availability of ER would be at the heart of that.
We would encourage owner-managers to contemplate whether it is appropriate to accelerate exit and retirement strategies and potentially lock in the 10% tax rate before it is too late.
Duff & Phelps is available to speak to entrepreneurs and their advisors in this regard on an initial "no obligation" basis. In particular, about how we can help with accelerated exit readiness diagnostics and the tax efficient distribution of capital through the solvent liquidation process.