If you were planning to sell your business or shares in the near future, you may need to revisit your plans, after the announcement in Spring Budget 2020 that the entrepreneurs’ relief lifetime limit has been reduced from £10 million to £1m.
The change took place with immediate effect on 11 March, meaning individuals who sell qualifying assets will no longer benefit from a reduced rate of capital gains tax on gains that exceed the £1m mark.
It comes as no surprise to those who had been watching for likely Budget measures, as the relief has been widely criticised for its cost, and for disproportionately rewarding a small number of people.
HMRC statistics show that 43,000 taxpayers claimed entrepreneurs’ relief in 2017/18, costing the Treasury £2.3 billion.
And according to the Institute for Fiscal Studies, three-quarters of that cost was claimed by just 5,000 individuals.
While some had called for the relief to be abolished altogether, others wanted reform, in order to keep it available to smaller business owners.
The Federation of Small Businesses argued that abolishing the relief would “destroy the retirements of thousands of business owners”, but limiting it to £1m would reduce its cost to £600 million.
This was the route the Chancellor seemed to take – continuing to offer an incentive to smaller entrepreneurs, while taking much wealthier individuals out of the relief and gaining some funds which could be put towards the spending plans he announced.
How does entrepreneurs’ relief work?
Entrepreneurs’ relief can apply when you sell:
- All or part of your unincorporated business
- Shares or bonds in your personal company
- Assets you have lent to the business, under certain conditions.
It allows you to pay capital gains tax at a reduced rate of 10%.
This lower rate applies on gains up to a lifetime limit, after which higher-rate income tax payers will need to pay at 20%.
In order to qualify when you’re selling all or part of your business, you must have owned the business and been either a sole trader or business partner for at least two years up to the date of the sale.
If you’re selling shares or securities, you must be an employee or office holder in the company, or one in the same group.
The company’s main activities should be in trading, or it should be the holding company of a trading group. Again, both of these conditions must apply for at least two years before you sell.
Other rules apply depending on whether or not your shares are from an enterprise management incentive.
If you’re selling assets you lent to the business, entrepreneurs’ relief can apply as long as you owned the assets but let your business use them for at least one year, up to the date of the sale. You must also have sold at least 5% of your part of the business.
In some cases, assets held in a trust can also qualify for the relief.
These rules are complex, so it’s essential to get professional advice before making plans to sell your business.
We can explain the details of the rules, and how the cut to the lifetime limit could affect you in 2020/21 and beyond.
Get in touch to discuss your business exit strategy.