One of the UK’s most experienced business brokers is calling on the Chancellor of the Exchequer not to sacrifice the retirement plans of thousands of hard-working small business owners by scrapping Entrepreneurs Relief from Capital Gains Tax (CGT) in next week’s Budget. Following further speculation in the Financial Times this weekend that the Government would scrap this tax relief, Chris Rowlands, managing director of Bury-headquartered Blacks Business Brokers, said that doing so would punish small business owners in a populist attempt to be seen to be targeting “fat cats” and private equity investors.
On 11 March the Chancellor of the Exchequer, Rishi Sunak, will deliver the first Budget of Boris Johnson’s Government. Reform of Entrepreneurs Relief featured in the Conservatives’ manifesto at the last general election and the Government has been hinting heavily at its abolition.
This weekend’s media speculation follows comments made by the Prime Minister earlier this year in which, according to The Times newspaper, he told a group of female entrepreneurs, “I have to tell you the Treasury is fulminating against it because there are some people who are staggeringly rich who are using that relief to make themselves even more staggeringly rich.”
Under the current system entrepreneurs who meet a number of basic criteria (and most do) pay 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 a total value of £10 million over their lifetimes. Abolishing it could effectively double the tax bill faced by a business owner who sells up.
Chris Rowlands said, “It would be a serious mistake to abolish or severely restrict Entrepreneurs Relief, because most people who benefit from it are not ‘staggeringly rich’. They have worked hard to build their businesses, taken risks and, when they sell, deserve to benefit as fully as possible from the long days and sleepless nights that went into making their businesses what they are today.
“Abolishing it would also encourage short-termism, and treat making a major investment of time or money in a private business in the same way as investing in non-productive assets. Entrepreneurs’ Relief was originally introduced in 2008 to go some way toward compensating business founders for the abolition that year of taper relief from CGT, and I believe scrapping it would create a number of perverse incentives that would, in the longer term, come back to bite the government and the public finances.
“However, in the short term it’s an easy win for the Treasury, in terms of revenue, and unlikely to provoke any kind of public backlash, so, much as I hope I’m wrong, I would be genuinely surprised if the Chancellor didn’t announce either its restriction or abolition in the Budget.
“The timing of any reform will be important. If it is effective from 6 April 2021 then the coming year is likely to see a business sale bonanza as entrepreneurs look to maximise their gains – although that itself could lead to a buyers’ market and lower transaction values. If, however, it is abolished with effect from 6 April 2020 then nobody will have time to prepare and any transactions that complete after that date will result in a doubled tax bill.”
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. If Entrepreneurs Relief were abolished then, 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.
