What now for businesses, after the budget?

What now for businesses, after the budget?

The government just stopped short of completely abolishing entrepreneurs’ relief in the Budget, but did overhaul the tax break.

But what do the changes mean for owner-managers who are looking to sell or even retire, and how can they optimise value from their businesses now?

Entrepreneurs’ relief was introduced in 2008 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 per cent instead of the usual capital gains tax rate of 20 per cent.

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Owner-managers often want to sell their business to cash in on their hard work or instigate a lifestyle change.

Irrespective, business owners could benefit – until now – from a reduced tax rate on their capital gain by utilising ER up to a maximum lifetime limit of £10m. In fact, the lifetime limit has risen from £1m at the time of the scheme’s inception to £10m today.

What changed?

In his debut Budget, chancellor Rishi Sunak stopped short of abolishing entrepreneurs’ relief altogether, but he did significantly scale it back by 90 per cent.

Consequently, business sellers will pay 10 per cent on lifetime gains of up to £1m, above which business owners will be charged the standard capital gains tax rate.

From March 11 2020, a £5m capital gain on the sale of a business would result in a £900,000 tax liability - a £400,000 increase compared to if that gain had been crystallised prior to the March Budget.

Why the revamp?

Entrepreneurs’ relief was originally intended to encourage owner-managers to reinvest profit, but financial observers suggests this has not had the desired effect.

Additionally, some critics suggest that entrepreneurs’ relief limits investment and innovation.

Some claim it incentivises owners to move their income from salary and dividends to the early realisation of capital gains.

With this, owners can avoid income tax and national insurance, leading them to pay proportionately less in tax than those who work for them.

The Institute of Fiscal Studies has claimed entrepreneurs’ relief had little impact.

In 2017-18 the IFS calculated that the tax break – which cost the UK £2.3bn – mainly benefited a small group of wealthy people.

Some three-quarters of the relief went to just 5,000 individuals, who made average tax savings of £350,000 each.

In summary, a portion of entrepreneurs’ relief was going to those who do not quite fit the bill of a person spending a lifetime building a business.

Instead, it has been used by already wealthy serial investors or contractors rolling income up in their business, with the intention of winding it down and taking the cash in a more tax-effective way.

Impact on business owners looking to sell

Some will be happy with the changes, as they are predicted to save the Treasury £6.3bn over the next five years. This money is now expected to be pumped into supporting small and medium-sized businesses.