Entrepreneurs’ Relief has long been seen as a controversial scheme, viewed by some as a way to reward those who are already financially prosperous rather than helping those just starting out in business. The flip side of this argument is that Entrepreneurs’ Relief rewards those who have taken a chance on starting a business in challenging times, thereby incentivising start-ups and new business initiatives.
With growing pressure to increase public spending, it is therefore no surprise that the government are poised to make changes to how Entrepreneurs’ Relief is managed in the upcoming Budget announcement. Estimates have shown that getting rid of Entrepreneurs’ Relief could save the government £2.4bn based on last year’s figures – an astonishing amount of money for a government looking to increase its revenue.
Whether the scheme will be pruned back or scrapped altogether is yet to be seen; however, it is almost certain that the face of Entrepreneurs’ Relief will change in the coming weeks. For those entrepreneurs looking to exit their business in the near future, they will be listening with intent when Chancellor Rishi Sunak takes to the podium later this month to deliver his debut Budget.
What is Entrepreneurs’ Relief?
While changes may be afoot, as it currently stands, Entrepreneurs’ Relief is a valuable tax relief scheme which allows shareholders to pay a reduced rate of Capital Gains Tax (CGT) when disposing of their profitable business.
Whether the business is sold to a third party or connected buyer, or alternatively wound up through a formal process such as a Members’ Voluntary Liquidation (MVL), the funds extracted are treated as capital gains rather than income, meaning CGT is payable rather than income tax. However, for the vast majority of shareholders, they will be able to limit their tax liability even further by taking advantage of Entrepreneurs’ Relief.
Entrepreneurs’ Relief halves the effective rate of CGT down to just 10% subject to a lifetime limit of £10m worth of gains per individual; in theory therefore, Entrepreneurs’ Relief could equate to a £1m tax saving for those who use their full allowance. There are no restrictions on how many times Entrepreneurs’ Relief can be claimed, nor is any consideration given to the income level of the individual who is claiming.
Who can claim Entrepreneurs’ Relief?
Entrepreneurs' Relief is available to business owners who have traded as self-employed sole traders, company directors, or partners upon the sale or disposal of their business (or part of the business) so long as they have at least a 5% shareholding in the company.
These conditions must have been met for a minimum of 24 months leading up to the sale or liquidation during which point the company must have actively traded.
How is a claim for Entrepreneurs’ Relief made?
Claims for Entrepreneurs’ Relief are made directly to HMRC either your end of year tax return, or by completing in Section A of claim form HS275. It is vital that this is done by the first anniversary of the 31st January following the end of the tax year in which the distribution from the sale or liquidation of the business occurred.
Do business owners need to be concerned?
Whichever way you look at it, Entrepreneurs’ Relief is an extremely generous scheme and represents a huge financial benefit to directors looking to capitalise on their business success. The scheme often forms a large part of the consideration when devising an exit strategy and determining the exit route for shareholders.
Should the scheme be abolished, or significantly altered, this will come at a great financial cost to anyone considering selling or closing their company in order to extract the proceeds within and any formal announcement as part of the Budget is likely to be met with criticism from business groups up and down the country.
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