What is Entrepreneurs' Relief?
When an individual sells their interest in a business, for example shares in family trading company, then this sale is subject to Capital Gains Tax. Whilst Capital Gains Tax rates are 20% for individuals with annual income (including the gain itself) in excess of £50,000, in most instances that individual will pay tax at just 10% due to the availability of Entrepreneurs' Relief.
Recent reform
Entrepreneurs' Relief is considered to be a generous relief, with figures suggesting that an estimated £25bn of tax has been relieved since it was introduced in 2008. Increasingly, noises have been made by the Government that Entrepreneurs' Relief would be under review.
Reforms effective as of 6 April 2019 increased the holding period for qualifying shares from one year to two years and made revisions to the minimum 5% shareholding requirements, to include a 5% economic interest too. However, there has been feedback that the reforms didn't go far enough.
What changes are in the pipeline?
With the upcoming budget on 11 March 2020 it is unclear whether it will include measures to enact further reforms. There is no doubt that the relief will be scaled back further in the near future and an announcement of some kind on Budget day is expected, whether that be the announcement of a consultation period, or immediately introduced changes, effective from 6 April 2020, or even from Budget day itself.
Possible changes could include adjustments to the 5% or 2 year holding requirements, the 10% relief rate, or changes to the lifetime limit which has been stood still at £10 million since 2011.
What actions should you take?
If you are contemplating a business sale then it is worth considering your plans in advance of 11 March, given the possibility that delaying risks proceeds being taxed differently from the present Entrepreneurs' Relief regime, leading potentially to additional tax costs.