What is Entrepreneurs’ Relief?
Entrepreneurs' relief (ER) is a UK tax scheme designed to incentivise people to grow a business. It works by reducing Capital Gains Tax (CGT) to a flat rate of 10%, rather than the higher rate 20%, on the first £10m of gains from selling a company.
The 10% rate is applied regardless of your income level. There is no limit to how many times you can claim within the £10m lifetime allowance. ER is subject to the following conditions:
The business must have been trading in the 24 months leading up to the date when the shares were sold
The person disposing of the shares has to be an officer or employee of the company in question
The person disposing of the shares has to own at least 5% of the ordinary share capital of the business
Entrepreneurs' Relief changes for 2020?
In their 2019 election manifesto, the Conservative party proposed to review the relief. In line with the critical observations mentioned earlier in this post, they stated that there are aspects of ER that don't achieve on what was originally intended. That would suggest we can perhaps expect some sort of reform. Or can we?
The Labour party on the other hand proposed to scrap ER and then align the rates of income tax and CGT. Given the weight of the voices criticising this relief and the calls for it to go, might this yet become a reality? If that were to happen then according to MoneyWeek this would mean that selling a business would be likely to result in a 50% tax rate. That represents a five fold increase on the existing tax rate when making use of ER.
What this means - tax planning
If you have plans to sell a business that you have built up, these announcements leave you with a potentially limited amount of time in which to achieve the disposal and make use of the relief. The situation will likely remain unclear until the Chancellor's Budget announcement on Wednesday 11 March 2020.
Depending on your circumstances, you may also be able to defer a CGT charge if the proceeds are re-invested in new business assets, known as rollover relief. Another scenario where CGT is put off is where business assets are transferred to a spouse or civil partner instead of being sold, known as hold-over relief.
Whatever the election result, it seems likely that the days of making use of ER for personal service vehicles could be numbered. If you're selling up, operating as a contractor, or have money sitting in your business then you'll need to act soon.
How to claim ER on self assessment
Currently ER can be claimed in company's that will cease trading and dissolve so long as there is adherence to the following:
The qualifying conditions stated earlier in this post were met 24 months prior to when the business ceased trading
The distribution of assets in the company takes place within 3 years from when the business stopped trading
Assets in the company are distributed as capital, not income
Whichever scenario is applicable, be sure to talk to your accountant about the various tax options available to you. Remember to claim ER you have to do so in the 31 January tax return submission, for the year following the disposal of your shares.