What next for Entrepreneurs’ Relief?

17th September 2019

With all of the current political turmoil, business owners may understandably be concerned about the future for Entrepreneurs’ Relief (“ER”).  

ER has long been the cherished mantle of the business owner, providing an opportunity to obtain a lifetime allowance of £10 million of capital gains at a tax rate of only 10%, typically when the business is sold or on an exit or retirement event.

However the relief has long been criticised as being particularly generous, especially when compared with the top rates of income tax of up to 45%. 

It has also been suggested that it provides an incentive to ‘exit’ rather than ‘invest’ in businesses, so is poorly targeted and hence its rationale has long since been called into question.

Whilst the Labour party hasn’t said how it would approach this particular relief should it have the opportunity to form a Government, they have intimated that there would be significant tax rises for businesses and business owners across the board.  

It is therefore not inconceivable that ER and a generous 10% tax rate would face the chop as part of that agenda, should that situation arise.

We of course do not know whether a Labour government, or indeed a Labour coalition could win the next election.  We do know however that an election maybe just around the corner, and in the current highly charged political climate, anything now seems possible.

Business owner? What can you do?

So if you are a business owner, should you be concerned and what can you do?

Well in light of the current turmoil,  there must now be genuine cause for concern, and the political balance could charge very quickly.  

Whilst we normally only have a Budget once a year and we’ve only recently had a 2019 Spending Review put forward by the current Chancellor, Sajid Javid, if there is an election then typically the newly elected Government would bring forward its own Budget pretty soon, possibly within a matter of weeks. This would set our their agenda for tax policy following on the back of their new political mandate, whatever that may be.

So if you are concerned about ER, what you can do?

Well, the key theme must surely be that if you are considering selling or exiting a business in the near term, then looking to accelerate that process may well become sensible tax planning.   

However, finding an external buyer at short notice to save tax may not be practical, or indeed provide the best negotiating platform to secure the best deal.

In the absence of a third party sale, it might be feasible to look at other options, such as some form of ‘internal’ transaction or succession strategy, perhaps as an interim measure.  

An example could be a Vendor initiated/ leveraged MBO. Indeed, it is possible to structure transactions with some form of ‘tax neutral’ vendor rollover (into shares or loan notes in an acquiring entity), but with the Vendor having the option to elect to crystallise the tax (or not) within a period of 22 months after the end of the tax year concerned.

This may provide the opportunity for a Vendor to hedge their bets on whether to crystallise the gain upfront, or instead over future years when they are paid out, depending on how things pan out on the tax front in the interim.

Capital gains tax

The other point to note is that under the tax legislation, the timing of disposal for capital gains purposes for assets disposed of ‘under a contract’ is based on the date the contract is ‘made’, and not when the asset is conveyed or transferred. 

This is typically the date of ‘exchange’ (where the contract is unconditional). 

However, the disposal does not take place or ‘occur’ until the contract ‘completes’. When it does complete, the disposal is effectively ‘read back’ to the earlier date of exchange.

Therefore it is possible in certain circumstances to structure a contract for sale that fixes the tax point and reliefs today, but avoids the gain ‘occurring’ until some point in the future when the parties are ready to ‘complete’, perhaps when greater clarity on tax rates is forthcoming.

Consider the options

Overall, business owners concerned about ER should think carefully about their situation and consider the options available to seek to utilise the relief, whether now or in the future. 

Tax is obviously one of a number of factors to consider, and there is inevitably no one-size fits all solution, so as ever, thinking creatively and planning ahead is key.

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