Scrapping Entrepreneurs’ Relief would destroy retirements, say small firms

On Wednesday, the IFS called on the Chancellor to abolish Entrepreneurs’ Relief, an incentive that entitles small business owners to a reduced rate of capital gains tax on the proceeds of selling their firms.

The think tank stated that the Entrepreneurs’ Relief title is ‘misleading’, arguing that three-quarters of the cost of the relief benefits 5,000 individuals with an average tax saving of £350,000.

The Federation of Small Business (FSB) has, however, argued that the relief is key to funding the retirement of business owners after they’ve sold their firms or transferred them to an employee ownership model.

Figures highlighted by the FSB show that, of the around 43,000 business owners who claim Entrepreneurs’ Relief each year, 38,000 do so on gains of less than £1 million, with an average saving of just over £15,000. 

“For many entrepreneurs approaching retirement today, their business is their pension. The few thousand they stand to save through this relief pails into insignificance when compared with the sums that many employees will gain through reliefs, the state pension and employer pension contributions,” said FSB national chairman Mike Cherry.

“There’s nothing misleading about the term ‘Entrepreneurs’ Relief’ – it’s the IFS’ statements that are misleading. It saves tens of thousands of businesses each year from having their businesses plundered by the taxman at the point of sale – businesses that have paid taxes year after year.”

He argued that removing Entrepreneurs’ Relief would disincentivise employee ownership – a model the FSB knows is proven to increase motivation and productivity levels – by taking a chunk out of the value of businesses as they’re handed over.

“We’re trying to encourage more business owners to think about responsible exit strategies. Upping capital gains tax at the point when they sell or hand on their firms will not help that,” said Mr Cherry.

“Fundamentally, we’re trying to make the UK a more, not less, attractive place to start an enterprise. Removing Entrepreneurs’ Relief is not sending the message that Britain is open for business – quite the opposite. Reforming the relief to target it at just the first £1 million of a business sale while scaling it back at the top end could mark a way forward.”

If reform goes ahead, as outlined in the Conservative Manifesto, the FSB has suggested reducing capital gains tax to zero on the first £1 million of a business sale to protect this substantial majority of business owners, and bringing the relief in-line with the pensions lifetime allowance, as well as the treatment of primary residential homes.