Capital Gains Tax  

How to make use of entrepreneurs' relief

  • Identify the importance of entrepreneurs' relief
  • Describe what steps one can take if fearful about changes in the Budget
  • Describe how entrepreneurs'relief is different from previous CGT reliefs
CPD
Approx.30min
How to make use of entrepreneurs' relief

In its General Election manifesto, the Conservative Party promised to “review and reform” Entrepreneurs Relief, noting that it has not “fully delivered on [its] objectives”. 

Now that the Conservatives have formed the new government – with a significant majority – one would expect them to implement their manifesto commitments.

It follows that those who currently qualify for Entrepreneurs Relief in its current form should review their options.

 

When it was introduced in 2008, Entrepreneurs Relief was intended to replace business asset taper relief (BATR). 

BATR and retirement relief were available to qualifying taxpayers without financial limit – and so could be more generous than the Entrepreneurs Relief regime which replaced them. 

Nevertheless, there has been sustained criticism of the failure of Entrepreneurs Relief to meet its policy objectives and of its unexpectedly high cost to the Exchequer.  

Current Rules

Simplifying greatly, Entrepreneurs Relief will typically be available to those who both: (1) work or hold an office in; and (2) own their business – either as a sole trader, a partner in a partnership or a (usually 5 per cent+) shareholder in a company. 

Those criteria must be met for the whole of the two years immediately leading up to the disposal.

The relief applies to a transfer of the whole or part of an interest in the business itself, or of an asset used in the business.

In some circumstances, it is also available to the trustees of a trust, provided that one or more of the beneficiaries of the trust qualifies for the relief in his or her own right.

In each case, the relief must be claimed by the taxpayer.

As it stands, Entrepreneurs Relief applies a reduced CGT rate of 10 per cent to the first £10m of qualifying gains.

It can be applied over any number of disposals and the £10m cap is a lifetime limit.

As the headline CGT rate is currently 20 per cent, Entrepreneurs Relief provides a tax saving of up to £1m for qualifying taxpayers.

Consultation and Reform

Business owners will hope that the government will consult before making any changes to the Entrepreneurs Relief regime, giving affected individuals and representative bodies an opportunity to comment on the proposals. 

After all, the government committed to prior consultation in tax matters in its “Protocol on Unscheduled Announcements of Changes in Tax Law” in the “Tackling Tax Avoidance” policy paper of March 2011 and re-confirmed its adherence to the principle in December 2017.

Options and Planning Opportunities

The more pressing issue is to decide how best to capitalise on the relief in its current form. One difficulty is uncertainty about when the rules will change.

A Budget is planned for 11 March 2020. 

That should set out the tax rates and policies for the tax year beginning on 6 April 2020.  Mid-year changes to tax rates and provisions are rare and it seems likely that any new regime should apply from 6 April 2020 at the earliest.