Entrepreneurs' relief under scrutiny
Tax reliefs attracted increased scrutiny in the run-up to the Budget, and CGT entrepreneurs’ relief was seen as a likely target for abolition or reform, as Andrew Goodall reports.
HM Treasury was fulminating against capital gains tax entrepreneurs’ relief because some “staggeringly rich” people were using it to make themselves “even more staggeringly rich”, Boris Johnson told an audience of entrepreneurs in January, according to The Times.
The prime minister said he would pass on one entrepreneur’s concerns – the relief was imperative for genuine entrepreneurs growing their ﬁrst business, she said – to the then chancellor Sajid Javid. But calls for the relief’s abolition or reform continued beyond mid-February, when Rishi Sunak assumed the role following Javid’s resignation.
A quick fix
The Labour government announced in October 2007 a new single CGT rate of 18%, alongside the abolition of taper relief. It said it was committed to ensuring that the UK had an “internationally competitive” CGT system. But taper relief had provided an eﬀective 10% CGT rate for higher-rate taxpayers. Chancellor Alistair Darling announced just three months later, in response to criticism, a new entrepreneurs’ relief intended to preserve the eﬀective 10% rate.
Gains qualifying for entrepreneurs’ relief are taxed at 10%, subject to a generous lifetime limit of £10m of gains. The relief can be worth up to £1m for a higher-rate taxpayer.
The Conservatives’ general election manifesto recognised in November that some tax measures had not “fully delivered on their objectives”. The party would review and reform entrepreneurs’ relief, it said. Responding to the manifesto, the Federation of Small Businesses (FSB) said the relief serves an important purpose and is “a large part of how many small business owners will plan for their retirement”. The FSB called for the consequences of any reform to be properly thought through.
But in a recent review of “tax expenditures”, the National Audit Oﬃce noted that the relief cost about £2.2bn in 2018/19, but an HMRC evaluation in 2017 “found that only 8% of people claiming entrepreneurs’ relief in the previous ﬁve years said it had inﬂuenced their investment decision-making”.
“This is a poorly targeted tax relief with a misleading name, since it does not only help true entrepreneurs,” Judith Freedman, professor of taxation law at the University of Oxford, tells Financial Accountant. “Most tax experts seem to agree it should go or be modiﬁed, but there will be a backlash from some ﬁnancial advisers and business groups.” She wondered whether the government would be able to resist the backlash.
“For the thousands of company owners who have taken on the ﬁnancial and emotional burden of building their own business over the years, the impact on them if the relief is abolished will be severe,” says James Pilbeam, a partner at Blick Rothenberg.
“The sale or winding up of their company represents the realisation of all their hard work, the post-tax proceeds intended to sustain them and their families into retirement – often in lieu of a pension,” he says.
“The loss of the relief will translate into hundreds of thousands – up to £1m – per person. I do not think there would be an ultimate impact on entrepreneurialism, but it would be a real kick in the teeth for people who currently qualify, and I think it would send out the wrong message about being an entrepreneur in the UK.”
Rollover relief for reinvested gains
George Bull, senior tax partner at RSM, tells Financial Accountant that it would be a simple matter for the government, faced with growing calls to reduce tax breaks for the wealthy, to scrap the relief.
“However, this would not accord well with the post-Brexit messages that the UK is open for business, that entrepreneurial businesses are the backbone of the UK economy, and that innovation is the way forward. I would not be surprised to see an interim announcement in the Budget, reducing the amount of relief and promising a consultation on change,” he says.
The relief might be “changed into a form of rollover relief” in the longer term, with qualifying gains sheltered to the extent that proceeds are reinvested in a further qualifying business within a deﬁned period, Bull suggests.
“Gains not reinvested after, say, three or ﬁve years would be subject to CGT. This would also apply to gains when the entrepreneur ﬁnally cashed up. With losses available to be oﬀ set against other gains during the entrepreneur’s business lifetime, there would be a certain policy logic in charging non-reinvested gains at the prevailing CGT rate. Whether some of those gains should be taxed at a reduced rate is a question of political optics,” he adds.
Andrew Goodall is a freelance tax writer and journalist