Will the 2020 budget scrap Entrepreneur’s Relief?
This year's budget may have bad news for business owners, as Boris Johnson confirms The Treasury opposes the "giveaway" tax break.
It’s fair to say that Gordon Brown might not be top of the list of Prime Ministers beloved by business owners. But in 2008, he did introduce one initiative that delivers significant advantages for anyone looking to sell a company. That’s Entrepreneur’s Relief, whereby qualifying individuals “pay tax at 10% on all gains on qualifying assets”, in the words of HMRC.
The qualification threshold was initially capped at £1m per person, but has since been raised to £10m, and it can make a huge difference to your Capital Gains Tax (CGT) bill when you sell all or part of a company. Compare that 10% to the standard 20% CGT rate, or the 40% income tax band for anyone earning over £50,000.
Financial commentators have noted the generosity of the scheme – and warned that ER couldn’t possibly last forever. One recently described the increase from Gordon’s initial £1m to the current £10m threshold as “the single biggest giveaway I've seen in my career.”
And yes, the calls to scrap ER are growing louder and louder. You may have seen reports that Sir Edward Troup, former executive chair of HMRC, has urged the government to scrap ER in its entirety. In his words, ER “gives £2bn CGT savings every year to those who have already made their gains.” And now, according to comments by the Prime Minister, reported in The Times, the 2020 budget may see ER disappear altogether. The Treasury is apparently against ER because it makes – and I quote – “staggeringly rich” people even richer.
How this affects BCMS clients
This has obviously caused significant consternation within the government, as well as the business community. And let’s be clear: if the Conservatives do scrap ER in 2020, then it will of course impact the amount of money our clients pocket from their business sale.
I should say, though, that in over 600 deals in the last decade, I have never known a client to decide to sell simply because of favourable tax rates. Our clients choose to sell for a range of reasons – including lifestyle and work/life balance, and to secure the best home for the business and its staff.
And while the noise around CGT is just that at the moment, this is clearly a news story worth following very closely indeed. It’s an obvious consideration for anyone thinking of selling a company in the next few years.
And while I would never encourage any business owner to sell before they’re ready, it’s hard to see there will ever be a better time to take advantage of ER.
So it may very well be worth exploring the potential market of acquirers sooner, rather than later.