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13 September 2018
There is widespread speculation that there will be additional restrictions placed on the availability of Entrepreneurs’ Relief in the government’s autumn budget. Speculation is mounting, following the report of the think tank ‘Resolution Foundation’ which dubbed Entrepreneurs’ Relief the UK’s “worst tax break”.
Most people are familiar with this relief. For any who haven’t come across it, Entrepreneurs’ Relief is the 10% rate of tax payable on capital gains on the sale of shares of up to £10m. This is a lifetime limit.
Only those employed by the company and holding more than 5% of the voting shares can qualify. If the sale proceeds are deferred often pending profits, Entrepreneurs’ Relief claim can cover this type of consideration as well.
The sums involved in Entrepreneurs’ Relief may be large but this to my mind is one of the reasons for the government to maintain this tax rate.
The Resolution Foundation report notes: “12 per cent of Entrepreneurs’ Relief claimants made claims on gains of over £1 million. But this small group accounted for a massive 69 per cent of the gains on which Entrepreneurs’ Relief was claimed as a whole.”
People selling their business and receiving decent consideration of a large cash sum are extremely well placed to afford to move to a lower tax jurisdiction taking money out of the economy, (is anyone else old enough to remember Phil Collins moving to Switzerland?). The tax rate under Entrepreneurs’ Relief is set at a level where business owners are happy to resist this temptation and keep the money in the UK.
As someone who deals with entrepreneurs all of the time, I would say that entrepreneurship looks more addictive than crack cocaine! Entrepreneurs who have been successful in one business don’t just hang up their boots. Think of someone like Julian Metcalf who started by setting up Pret a Manger before selling that and setting up Itsu and Skinny Popcorn. Or how about Sir Richard Branson? The gains those serial entrepreneurs have made and then use to fund their next business may only have been taxed at 10% for the first £10 million, but incredibly often those funds roll into new businesses in almost indecent haste.
There are currently hundreds of millions of pounds invested in start up enterprises the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). These schemes act to encourage investors to take a risk on early stage high risk businesses with a reward of an income tax break on the way in and no capital gains tax to pay on the way out on any growth in that company. Entrepreneurs’ Relief is intended to incentivise those who take risks by setting up new businesses and increasing the gap between the tax rate of founders and investors will act as a large disincentive.
With so many investors benefiting from nil rates of capital gains tax (CGT) by investing under these EIS and SEIS schemes it would be incredibly harsh to penalise the founders of those same companies with a rising tax rate when they exit. This would mean that while an investor walked away with 100% of the gain in their shares, the founder who had started the entire business would be walking away with a substantially smaller proportion.
So, those are my views on why Entrepreneurs’ Relief should be here to stay, but who can second guess the decisions of the cash strapped government?
Unfortunately we do not have a crystal ball, but we do expect the Chancellor to be careful not to release details which would see a rush of pre-emptive Entrepreneurs’ Relief sales before the Autumn Budget.
If you believe you currently qualify for Entrepreneurs’ Relief and you have been thinking about selling up, the question is: should you make a commercial sale around a possible tax change?
Our overarching advice is always “don’t let tax be the tail that wags the dog”. Make your commercial decisions sensibly. However if you have settled on making a commercial change or company buyback or already have a sale in the pipeline, completing any transaction before the Autumn budget rather than just after will settle your nerves (and potentially your bank balance).