In a blog on 29 August 2018, Adam Corlett of the Resolution Foundation called entrepreneurs’ relief “quite likely the worst tax relief in the UK”. It was estimated to cost the exchequer £2.7bn in 2017/18 and many organisations have been lobbying for it to be abolished. In his Budget speech, Philip Hammond said:
“I have received representations that I should abolish Entrepreneurs’ Relief and put the savings towards funding our NHS commitments. But I do not believe we can have sustainable public services unless we have a dynamic economy. And encouraging entrepreneurs must be at the heart of our strategy. So I will retain the Entrepreneurs’ Relief but to ensure it is going to genuine entrepreneurs I will extend the minimum qualifying period from 12 months to 2 years.”
This could be taken as a big vote of confidence in entrepreneurs’ relief, if it wasn’t for the fact that Philip Hammond doesn’t seem to have much political capital and so isn’t necessarily in a position to say or do what he really wants. It has something of a vote of confidence by the owner in a football club manager. It is starting to look like the writing is on the wall for entrepreneurs’ relief and we are certainly advising clients to take advantage of it while they can.
Entrepreneurs’ relief is a 10% tax rate on sale compared to most likely the 20% main rate of capital gains tax. The lifetime limit is £10m so the potential tax benefit per individual is £1m – £2m for a husband and wife. It’s a big money tax relief and it’s a major area of tax advice for my firm.
In the Budget yesterday, it was announced that from April next year that the qualifying time period for individuals would be extended by a year. In itself not a huge change but one that makes structuring to take advantage of entrepreneurs’ relief more difficult. This is especially so for companies, where the technical changes to be made to the legislation, may in fact create a three year qualification period.
Of more pressing concern are the changes to the relief that weren’t mentioned in the speech but took place with immediate effect yesterday. These introduced further qualifying conditions for shareholders in trading companies which impact on those companies with complex share structures. The new rules require there to be 5% economic ownership of the underlying company and the approach is based on some provisions that were originally established for group relief purposes over 20 years ago. This means that the path is fairly well-trodden and we can reasonably easily interpret how they are meant to work.
This is the latest instalment in attacks on entrepreneurs’ relief which started in 2015 with excluding the sale of goodwill to a connected company but more significantly moved onto tightening up the associated disposal rules in 2016. This is the biggest change yet but is unlikely to be the last. The biggest dilemma now is how far to go on re-structuring to qualify given the new two year qualification time period from next April. Will the relief still be in place in the tax year 2021/22?