Family owned businesses hit by slashed entrepreneurs’ relief

The virtual abolition of entrepreneurs’ relief in Budget 2020 came as a blow to family owned businesses as the tax break is cut to £1m with immediate effect. Philip Smith assesses the fallout 

The Chancellor needed a few more billion pounds to help sanitise his coronavirus spending strategy and entrepreneurs’ relief was an easy target. But does it make commercial sense to slash the relief, asks Philip Smith.

In his first Budget, Rishi Sunak took an axe to the tax break, which currently costs the taxpayer £2.7bn and only benefits an estimated 6,000 individuals a year. But he did not abolish the relief altogether.

Instead, he has turned the clock back to 2008, another time of great economic uncertainty just after the financial crash.

Back then, when the relief was first introduced to mitigate a new flat rate 18% capital gains tax (CGT) that was introduced at the same time, the lifetime allowance was set at £1m.

This first £1m would be taxed at 10% rather than at the CGT rate, which had previously been governed by a taper relief.

In 2010, it was doubled to £2m, with a further extension to £5m in George Osborne’s emergency Budget under the Coalition government later that year.

A year on and Osborne again doubled the limit to £10m, where it has remained, despite continuing rumours of its possible demise.

But now, amid detailed forestalling measures, the relief has been reduced to £1m. Experts believe this will only affect 20% of those that can benefit from the relief, leaving much of entrepreneurial Britain untouched, and therefore unmoved, by the reduction.

Negative move for family businesses

But there is one group that will suffer as a consequence - family businesses.

‘Many genuine entrepreneurs will not be affected by this change,’ says Rebecca Durrant, head of private clients at Crowe. ‘But there will be an impact on family businesses, which typically will have been around for a long time and will have a higher value.’

This could have a considerable impact on retirement plans as potentially there could be up to £900,000 in additional tax to be paid by each family shareholder.

‘If the business was owned by a husband and wife team that are looking to sell on the business and retire, then that is up to £1.8m in additional tax,’ says Durrant. ‘Such people will have to rethink their plans.’

A key point to remember is that the lifetime allowance applies to individuals rather than businesses, so the move to reduce the allowance could accelerate succession planning.

In the case of a family business, it could encourage founders to pass on more shares to other family members.

Serial entrepreneurs

The move will also affect serial entrepreneurs, those that have started up and sold a number of businesses.

Richard Godmon, tax partner at Menzies, welcomed the fact that ER had been restricted rather than abolished, but believes this could affect the level of future investment by those that have risked their personal capital to establish a succession of businesses.

‘The restriction of the lifetime limit from £10m to £1m is a substantial reduction and will impact serial investors who use the sale proceeds to establish new businesses,’ says Godmon.

There are also fears that the move could encourage entrepreneurs to leave the country, perhaps not a desirable result with the UK itself leaving the EU.

EY head of tax policy Chris Sanger says: ‘The Chancellor in his speech quoted criticisms of ER, noting concerns that it was only encouraging one in 10 entrepreneurs to start up.

‘However, the original aim of the relief was instead to encourage those successful entrepreneurs to stay in the UK and pay tax on their success, and then to reinvest and continue to contribute to the UK’s growth.

‘The Chancellor will be hoping that removal of this allowance for the most successful will not encourage them to leave the UK, thereby paying no tax, and hence losing the 10% they would otherwise have paid, costing the Exchequer rather than filling the coffers.’

Immediate effective date

The immediate enactment of the policy will have caught people on the hop, even though there has been speculation for some time that entrepreneurs’ relief would be in the Chancellor’s sights.

Certain disposals made before 11 March 2020 will be caught in order to counteract recent tax planning arrangements.

Andy Hodgetts, a corporate finance senior manager at Buzzacott, advises that all transactions entered into with a view to crystallising entrepreneurs’ relief before the Budget should be reviewed to establish whether they will be caught by the new rules and entrepreneurs should reconsider their plans for future disposals.

‘The government has also said there will be measures to unwind any tax avoidance with any ‘clever’ schemes,’ he says. 

The £1m lifetime allowance is still a benefit, even if reduced. This is especially true for companies with multiple founders/shareholders, for example, a business with four founders would still get £4m of cumulative relief, meaning that on a £10m exit the lost tax relief is only £600,000 (£6m over the limit multiplied by 10%).

‘While a blow to entrepreneurs, the differential is not as big as it once was, with capital gains tax remaining at a 20% rate,’ Hodgetts says. ‘However, maximising value on exit can still help to counteract the impact of the reduced tax benefit; for example, a 10% increase in the exit price for businesses will help counteract the value lost through the reduction in tax relief.’

Paying more into a pension could help mitigate the loss in relief to a small extent. Mark Levitt, partner at Blick Rothenerg says: ‘Business owners should consider paying more into their pensions given the relaxation of reliefs for those earning £200,000.’

It should also be remembered that ER is just one of a number of tax incentives aimed at entrepreneurs, so although it represents a loss for some, advisers believe the UK tax system still offers help for entrepreneurs.

‘This incentive has been under the microscope for a while following concerns that it is costing far more than was originally anticipated and didn’t entirely deliver on its objective to act as an catalyst for investment in and growth of entrepreneurial businesses,’ says David Bywater, a private enterprise tax partner at KPMG.

‘The tax relief costs the UK over £2bn a year and with the Chancellor tasked to find the money to help the government deliver on its promise to level up regional inequality it was in the firing line as an expensive initiative that benefitted the few and could help the many.’

About the author

Phil Smith is contributing editor to Accountancy Daily and a specialist audit, business and accounting writer and author

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