Following reports last year that entrepreneurs’ relief was ‘quite likely the worst tax relief in the UK’, substantial changes were introduced in the 2018 Budget, tightening up its availability. In its recent paper ‘Just Tax’, the Institute for Public Policy Research (IPPR) proposed that entrepreneurs’ relief should be abolished entirely.
The IPPR records that entrepreneurs’ relief is heavily criticised by some commentators for being ‘expensive, regressive and ineffective’ and allows claimants ‘to be charged tax at just 10 per cent on what is effectively a return on their labour’. Instead, it is suggested that capital gains are taxed at income tax rates, with relief either given for inflation or by only taxing gains over a permitted annual rate of return.
Despite the changes brought in last year to narrow its scope, entrepreneurs’ relief continues to be a costly relief. In the 2017/18 tax year, HMRC statistics show that 43,000 taxpayers claimed it at an estimated cost to the taxpayer of £2.3bn. HMRC figures estimate that this cost is likely to fall slightly following the rule changes, but only to £2.2bn in 2018/19 and £2.1bn in 2019/20.
Whilst it would have been a surprise politically for the current Chancellor to abolish entrepreneurs’ relief altogether, his opponents on the Labour benches are already calling for its demise and a pre-emptive step in the now postponed Budget could have taken the wind out of their sails. It might also have had the benefit of preparing the ground for a potential coalition government following a general election. So, what might business owners be thinking about in the meantime?
The first thing is not to panic. Rumours of the potential demise of entrepreneurs’ relief have emerged ahead of numerous Budgets and, whilst there have been changes, the substance of the relief for the vast majority of business owners has remained the same.
If there were a change in government and an emergency Budget announced (which admittedly might not be far away) then one might anticipate a radical change. However, whenever substantial changes have been announced to capital gains tax rates in the recent past, they have not generally taken effect overnight and changes to entrepreneurs’ relief might, for example, take effect from the start of the next tax year, minimising the impact on transactions currently underway.
For those who worry that entrepreneurs’ relief might not survive, its provisions allow taxpayers, in certain circumstances, to elect to trigger gains on which relief can apply before an ultimate disposal of the shares in their company. In particular, those who have inserted a holding company in the 2017/18 or 2018/19 tax years or subsequently, or have had their shareholdings diluted below 5 per cent on or after 6 April 2019 may be able to make such a claim. A downside is that taxpayers who elect to trigger gains will not necessarily have the cash to pay any resulting tax liability, although it may also be possible to elect to defer payment of tax on certain gains triggered on dilutions until the ultimate disposal of shares .
In a similar vein, where companies are currently considering a transaction or a restructuring exercise and there are genuine commercial reasons for doing so, it may make sense to consider accelerating those plans so that the shareholders may also benefit from the elections outlined above. Alternatively, for those with a longer outlook, there are other opportunities to exit a business tax effectively as seen with the increased uptake in the employee ownership models.
Taxpayers may get into difficulty where they do something rash and are motivated purely by a potential change in tax rates. Even if time is short, careful thought should be given ahead of any steps taken, to ensure they make sense commercially and actually work. Taking the wrong action may result in a large tax bill with no cash to pay it, even if the tax rate is only 10 per cent.