This important tax relief is at risk of being abolished in the upcoming Budget.
“Quite likely the worst tax relief in the UK”, was the harsh verdict on the hitherto relatively uncontroversial entrepreneurs’ relief from think-tank the Resolution Foundation last month. It looks as if this relief will need some vigorous defence if it is to survive the upcoming Budget.
Let’s recap its main outlines. Capital gains tax entrepreneurs’ relief has operated since 2008. Before that, there was a more limited but misleadingly labelled “retirement relief”, which did not require the claimant to retire in order to claim it. Claimants of the relief will pay 10 per cent CGT on all gains on qualifying assets, rather than the more normal 20 per cent.
The main qualifying assets are all or part of a business as a sole trader or business partner, and shares or securities in a personal company (i.e. one in which the claimant has at least 5 per cent of shares).
The relief also applies to assets the claimant has lent to their business or personal company, and shares they have received under an enterprise management incentive scheme since April 2013. Trustees can also claim entrepreneurs’ relief if they are disposing of qualifying assets.
The relief is subject to an aggregate lifetime limit of £10m per claimant and most of the conditions to claim it have to be met for at least the 12-month period running up to the disposal. The HM Revenue & Customs website is packed full
of information if you need to
So, why does the Resolution Foundation characterise entrepreneurs’ relief as being of “very little merit indeed”? Mainly because of questions around whether it provides value for money.
HMRC has estimated the relief was worth a total of £2.7bn in 2017/18 and the Resolution Foundation reckons the total amount over 10 years has been £22bn.
It complains that most of the benefits go to a small minority – a few thousand claimants who are mainly rich, male, a bit elderly and living in the South East.
It questions whether the relief really incentivises those people who start businesses.
Indeed, it says very few that have established SMEs were actually aware of it when they first invested.
It also states entrepreneurs’ relief’s biggest impact is in distorting certain business decisions, notably to incorporate and not to draw earnings or dividends out of companies.
What should advisers’ response be to this? Well, first let’s get rid of the last point. Entrepreneurs’ relief does not incentivise incorporation. As we have seen, the relief applies just as much to unincorporated businesses.
And deciding to reinvest in a business rather than draw dividends generally seems to be a worthy outcome of an incentive.
If you think entrepreneurs’ relief is worth defending, then this is the time to start saying so loud and clear to fellow Money Marketing readers, MPs, newspapers, websites, Twitter and so on. Because there is a strong case for its defence, even if the Resolution Foundation does not think anyone will be prepared to make it.
Entrepreneurs’ relief is one of the most important contributing factors to have made the UK an enterprise-friendly environment; one where people want to set up small businesses and work on growing them.
There is a serious danger that a cash-starved chancellor could trim or even abolish it in the upcoming Budget.
It is now commonplace for men and women – young and old – to set up SMEs. I hesitate to draw on ancient history but I clearly remember when I was in my 20s, my goal and the aim of my friends was to work in large organisations like the civil service, BBC or an oil company. The SME world was barely on our horizon.
Now entrepreneurs’ relief is part of the generally welcoming landscape for SMEs and those starting up businesses recognise that even if they do not yet know the details.
Not that the attitudes of people starting up in business should be the most important criterion. The knowledge and understanding of more experienced and perhaps serial entrepreneurs is a more important indicator of the relief’s importance and value.
The fact that relatively few people get the lion’s share of entrepreneurs’ relief is an indication of how far there is still to go in nurturing successful SMEs.
It takes time to change a climate and it is not helped by constantly threatening and fiddling with the rules.
Danby Bloch is chairman of Helm Godfrey and consultant at Platforum