Entrepreneurs’ relief – the end?
Entrepreneurs’ relief (ER) planning is very popular, unsurprisingly, since it may give people disposing of their businesses up to £1 million of tax relief over their lifetimes. However, as with any aspect of tax law, the government can make changes with little or no notice. In times of economic and political uncertainty, such as in the current climate, dramatic changes are sometimes announced. Against a backdrop of the substantial costs of Brexit, it is not surprising that there is an increasing focus from think tanks and politicians on entrepreneurs’ relief, with credible calls being made for its abolition.
Who has suggested that entrepreneurs’ relief should be abolished?
ER has been the subject of plenty of scrutiny going back several years. The Labour Party has repeatedly called for it to be reviewed. In January 2019, think tank The Resolution Foundation also recommended that the relief be limited or scrapped entirely. In its 2018 report on the business lifecycle, the Office of Tax Simplification suggested that the availability of ER did not sufficiently encourage entrepreneurial activity and should be subject to further review.
Now, the idea of limiting or removing ER is gaining increasingly persuasive and compelling support. On 21 October, the Institute for Fiscal Studies (IFS) released a detailed research report, concluding that, despite the high cost of ER (£2.6 billion in 2018/19), it does not appear to encourage the types of behaviours for which it was originally designed. In response, Sir Edward Troup, the former head of HMRC, called for the relief to be abolished, tweeting that it “gives £2bn CGT savings every year to those who have already made their gains and provides no incentive for real entrepreneurship”. The Association for Accounting Technicians (AAT) has also recently stated that it wants the government to get rid of ER, describing it as ‘extremely expensive, misguided and ultimately ineffective’.
Potential changes to ER
Since its introduction in 2008, there have already been several changes to ER. Most recently, Finance Act 2019 introduced changes making it more difficult for disposals to qualify for relief. These changes are explained in an earlier insight ‘Entrepreneurs’ relief – changes made by Finance Act 2019’.
The government could act in a variety of ways in response to the growing calls for changes to the relief. It could abolish it altogether, reduce the lifetime allowance, increase the ER rate (currently 10%) or try to better target relief. For instance, it could change the rules to deny relief where cash has been accumulated within companies rather than being reinvested for business purposes. Or it may of course take no action at all and leave the relief alone for the time being although, given the press coverage of the IFS’s report in particular, this would probably be viewed unfavourably by the majority of the public.
Anyone considering making disposals of shares or other business assets which currently qualify for ER would be wise not to take it for granted.
If you would like advice about ER or business disposals generally, please do get in touch.