Budget 2020 - Entrepreneurs' Relief slashed

Effective immediately for transactions completing on or after 11^th March, the lifetime allowance for Entrepreneurs’ Relief has been slashed from £10m to just £1m, in Rishi Sunak’s first Budget as Chancellor.  This will affect business owners who receive more than £1m as their share of proceeds when a business is sold.

Entrepreneurs’ Relief allows individuals to benefit from a reduced rate of Capital Gains Tax of 10% on the sale of shares in a trading company (as well as certain business assets).  The main conditions have not been changed and, for a share sale, generally individuals must both have more than 5% of the equity and voting rights and be an officeholder or employee in the two years leading up to the disposal.  The relief could have saved a taxpayer up to £1 million over their lifetime under the old rules, however, under the new rules, the maximum saving is reduced to just £100k (a reduction of 90%).

Some form of change to ER was tipped to be included in the Budget, but the hope was that any changes would have a limited impact.   Although Mr Sunak stopped short of abolishing the relief in full, the changes will have a significant impact on business sales in the coming weeks, months and years. 

As ever, there is devil is in the detail.  In addition to reducing the limit to £1m, effective immediately, several “anti-forestalling” rules were also introduced.  Under old rules, individuals that exchanged shares in one company for those in another could elect to trigger a gain on which Entrepreneurs’ Relief could be claimed.  The new rules effectively mean that, in most circumstances, share exchanges between 6 April 2019 and 11 March 2020 can no longer benefit from the old Entrepreneurs’ Relief limit by making this election.  This is an unprecedented move that creates an effective “retrospective change”, and will leave some taxpayers worse off than if they had made the same election before budget day. 

With a lower lifetime allowance it becomes more important than ever to consider shareholder structures well in advance of any potential sale.  Ensuring spouses or wider family members qualify for Entrepreneurs’ Relief in their own right can result in additional relief, arising from multiple lifetime limits.  There can also be other reliefs available for those willing to reinvest proceeds into replacement assets.  We recommend those considering a disposal of shares seek tax advice well in advance of a sale.

Our team have analysed this year's Budget announcements, and our analysis can be seen here and in our separate blog summarising the main changes.

Upcoming events and tax updates

In addition, we are hosting a series of subject specific tax update events over the course of the year.   Tax affects us all, so whatever your circumstances, one of our events might interest you.  

If you would like to discuss the above in more detail, or look into how your business could save corporation tax, then why not drop us a line today to see how our tax team can help your business thrive.

Other related articles;

• Register now to attend one of our 2020 tax update events
• How to reduce Corporation Tax
• R&D Tax Relief explained
• RDEC - cash repayments from HMRC for large companies