Key points from the Chancellor's Autumn Statement 2014
For business owners, Entrepreneurs’ Relief (ER) is a valuable tax relief that gives a tax rate of 10% on the sale of business assets. Where ER is not available the tax rate is generally 28%.
Two changes to ER were included in the Autumn Statement; one positive and one negative.
Firstly the bad news; until today, when a sole trader or partnership incorporated their business into a limited company they could sell the “goodwill” of the business, that is the business value over its net asset value, to the company and pay only 10% capital gains tax on the sale.
As the goodwill was calculated on future earnings this effectively meant that the business owner could pay 10% capital gains tax on future earnings of the business. For higher rate and additional rate taxpayers paying tax at 40% or 45% respectively this was a valuable relief.
With immediate effect, sales of goodwill will no longer qualify for ER meaning the business owner will pay 28% capital gains tax on the sale.
We would always recommend that a valuation of goodwill is carried out before any incorporation and this is still the case following the Autumn statement changes.
Most incorporations are carried out for good commercial reasons and tax savings are an incidental benefit. This change reduces the benefit but it may still be worth considering incorporating your business after looking at the commercial factors and other tax benefits.
The second change allows individuals to claim ER where the gain has been deferred into investments qualifying for Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) relief.
Previously, if an individual has a gain qualifying for ER and a 10% tax rate, but decides to defer the gain by investing in an EIS or SEIS investment, when they sell the EIS/SEIS shares the original gain becomes chargeable without the benefit of ER at 28%.
From now, on the sale of the EIS/SEIS shares the original gain held-over will qualify for ER.
We will have to see, when the draft legislation is produced, whether there are any restrictions on this measure, such as the size of the shareholding in the EIS company, that might prevent ER from applying.
For more detail or to discuss anything in detail, please contact Andrew Grant.
Scott Burkinshaw
Scott is Tax Partner at Shorts, specialising in providing strategic corporate and personal tax advice.
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