Home Business Services “A pragmatic, if disappointing, compromise” – Blacks boss reacts to Entrepreneurs Relief...

“A pragmatic, if disappointing, compromise” – Blacks boss reacts to Entrepreneurs Relief cut

Chris Rowlands of Blacks Business Brokers

The decision to scale back, rather than abolish Entrepreneurs Relief from Capital Gains Tax, which was announced yesterday by Chancellor of the Exchequer Rishi Sunak, has been described as “a pragmatic, if disappointing, compromise” by one of the UK’s most experienced business brokers. He also, however, expressed his disappointment that the reduction in the lifetime allowance for the relief was being introduced with immediate effect.

Reacting to yesterday’s announcement, Chris Rowlands, managing director of Blacks Business Brokers, said “Abolishing Entrepreneurs Relief outright would have punished small business owners in the name of targeting ‘fat cats’ and private equity investors. Instead, by reducing the lifetime limit to £1 million the Chancellor has made a pragmatic, if disappointing, compromise that saves the lion’s share of the cost to the Treasury while sending the message that the Government still values the contribution of the small-scale entrepreneurs who make up the backbone of the British economy.”

Research by the Resolution Foundation found that, in 2015/16, of 52,000 people who claimed Entrepreneurs Relief, just 6,000 made claims on gains of more than £1 million. This group, which represented 12 per cent of beneficiaries, accounted for 69 per cent of the gains.

Reform of Entrepreneurs Relief featured in the Conservatives’ manifesto at the last general election and the Government had been hinting heavily at its abolition for some time.

Under Entrepreneurs Relief business owners who meet a number of basic criteria pay Capital Gains Tax (CGT) at ten per cent rather than the full rate of 20 per cent (for higher rate income tax payers*) on any gains they make when selling their businesses up to the lifetime limit. Until yesterday the lifetime limit was £10 million but it has now been reduced to £1 million.

Following yesterday’s reform, the tax on gains between £1 million and £10 million will effectively be doubled. Someone selling a business for £10 million will now face an additional tax bill of £900,000.

The lifetime limit for gains eligible for Entrepreneurs Relief is being reduced with immediate effect. Mr Rowlands said, “It is disappointing that the Government did not at least wait until the new financial year to implement the reduction in the lifetime allowance. That might have enabled vendors of larger businesses to conclude planned transactions that were already at an advanced stage but, instead, vendors whose sales complete tooday will be significantly worse off than those whose transactions were concluded two days ago.

“In the longer term it will be interesting to see the impact of this measure on deal values in the mid-market and whether vendors hold out for higher prices to compensate for the loss of tax relief.”

CGT is paid on the gain when an individual sells an asset, meaning that if somebody purchased an asset for £200,000 and subsequently sold it for £300,000 then only £100,000 would be subject to CGT. If, however, they were selling a business they built from scratch then the whole amount for which it was sold would be likely to be taxable.
Like income tax, individuals each enjoy a modest allowance (currently £12,000) below which no CGT is payable on taxable gains in any given year. Someone who sold a business they had built from scratch for £300,000 would currently pay CGT on a gain of £288,000.
With the benefit of Entrepreneurs Relief their total tax bill would be £28,800, leaving a net gain of £271,200. Without Entrepreneurs Relief, assuming they were a higher rate income taxpayer*, they would pay a total of £57,600 in tax, leaving net proceeds of £242,400.

* Capital Gains Tax is currently charged at a standard rate of ten per cent on taxable gains that, combined with the vendor’s income that year, take the taxpayer’s total income up to the threshold for payment of higher rate income tax. Any taxable gains that, combined with the taxpayer’s other income, fall above the higher rate threshold suffer tax at a marginal rate of 20 per cent. Higher rates (18 per cent for basic rate and 28 per cent for higher rate taxpayers) apply to the sale of second homes and residential buy-to-let properties.