The prime minister has given his clearest indication yet, that entrepreneurs’ relief is going to change and could even be scrapped altogether.
But with Brexit changes set to put pressure on trading conditions in the year ahead, is now the right time to remove this much-valued tax relief and how might entrepreneurial investors react?
Speaking at an event recently, Boris Johnson said that entrepreneurs’ relief was serving to make rich people ‘even more staggeringly rich’ and indicated that the Treasury is committed to making changes.
It seems that the changes to entrepreneurs' relief could be more drastic and more imminent.His comments seemed to uphold the views of the Institute of Fiscal Studies published last year, which found little evidence that the relief is an incentive for investment.
Review and reform
While some change to entrepreneur’s relief has been expected for some time, advisers had been hoping that the government would stick to the ‘review and reform’ approach set out in its recent election manifesto.
However, it now seems that the changes could be more drastic and more imminent.
With tax savings of £2.2bn in 2018-19, which is four and a half times the level forecast at its introduction in 2008, the case for action to curtail or remove entrepreneurs’ relief has strengthened significantly over the last few years.
However, removing the incentive altogether would contravene the long-standing idea that it is appropriate to reward owners and investors for risking their capital (as seen with the Enterprise Investment Scheme for external investors) and could cause a significant backlash from the business community.
While the government may argue that the presence of entrepreneurs’ relief does not drive investment decisions, the fact is that financially astute business owners and entrepreneurial investors do consider tax incentives in weighing decisions to invest their capital.
This is especially true for more marginal ventures that may nevertheless create jobs and generate profits upon which taxes are paid.
If such incentives are removed, individuals will be less likely to invest their money and any economic benefits that might have resulted, would be lost.
Successful SMEs
Government business population figures confirm that SMEs represent 99.9 per cent of private businesses in the UK and employ over 16m people.
Importantly, these businesses are also recruiting at a rate that is four times faster than larger businesses.
It seems unwise to disrupt such a productive engine of investment and economic benefit, which is integral to these achievements.
Rather than scrapping entrepreneurs’ relief, the government could introduce reforms with a view to trimming the tax cost slightly.
For example, a slight increase in the discounted rate of CGT, which is applied to profits generated by the sale of qualifying assets – currently 10 per cent, or a reduction in the overall lifetime allowance - currently set at £10m - could be considered.
Conditions could also be imposed, requiring investors to hold shares for a longer time.
In another scenario, entrepreneurs’ relief as we know it, could be replaced by a comparable system more closely aligned with the government’s objectives.
Before taking any action however, the effect of these changes should be considered carefully, and a review should be undertaken.
While such reforms might be viewed by some business owners as relatively minor, the impact on serial entrepreneurship and the economic value such activity generates over a sustained time period, should not be underestimated.
Rather than selling up and heading for a retirement in the Caribbean, these investors plough the money they have made into their next venture, creating more jobs and generating more economic benefits as they do so.
These entrepreneurs are also more likely to place their capital in start-ups or other high-risk ventures.
Has the Government really considered the effect that the removal of entrepreneurs’ relief could have on this virtuous cycle of investment?
With change on the way, investors looking to dispose of qualifying business assets should seek advice, as it may make sense to bring forward their plans.
For others, without any current plans to dispose of assets, it is best to sit tight until there is more clarity.
With Brexit on the horizon, there is much at stake for a Government that professes to be on the side of small businesses.
To show that that the UK remains an attractive place for business investment, could entrepreneurs’ relief yet be in line for a last-minute reprieve?
Stephen Hemmings is a tax partner at accountancy firm, Menzies LLP.
