Capital Gains Tax – Entrepreneurs’ Relief

Entrepreneurs’ Relief (“ER”) allows for a 10% capital gains tax (CGT) rate on the disposal of a business. The main CGT rate is 28% and the top rate of income tax is 45% (47% once national insurance is included), which makes the 10% tax rate is very attractive.

In order to qualify for ER there must be a qualifying business disposal.

The individual/trustee has to have owned the business for the year leading up to the date of disposal.   Even assets which have been used for the purpose of the business where the business ceases to be carried on can also qualify if the disposal is made within three years of cessation and the individual owned the business for the year preceding the cessation.

For shares, provided the company is a trading company, the individual is an employee or office holder and has owned 5% of the ordinary share capital throughout the year preceding the disposal, then on the sale of those shares the 10% rate will apply.

If there had been a change of government then it is believed that the relief would have been abolished. There are those who believe that income tax and CGT rates should be aligned, including the Liberal Democrats whose manifesto included a review of CGT.  Currently, CGT raises minimal cash for The Treasury and it is felt that more can be squeezed from the tax.

In his Budget Speech on 18 March, George Osborne stated that his intention was to “close loopholes to make sure Entrepreneurs’ Relief is only available to those selling genuine stakes in businesses”.  The following measures have also been announced and formed part of the most recent Finance Act:

  • Blocking ER being claimed on the value of goodwill realised on incorporation, which prior to the change enabled future company profits to be extracted at 10%. The planning was common were an existing business decided to change to a limited company owned by the same person
  • Measures to prevent land sales by farmers to developers being structured as an associated disposal by combining the sale with a contrived reduction in an interest in a partnership.
  •  Blocking contrived business structures enabling individuals to access the relief who effectively held less than 5% of the share capital.

Although it was the Conservatives who increased the lifetime limit from £2m up to £10m for the relief, it is now being looked at as being too generous.

The ER legislation was rushed in by the then Labour Government, as a “knee jerk” reaction to the abolishment of taper relief, which businesses lobbied against, as it impacted business owners who had worked hard to build their business and had lost the beneficial 10% CGT rate under the old business asset taper rules. The recent anti-avoidance measures have also been rushed in, as the Finance Act was passed very quickly after the Budget statement but before Parliament closed on 30th March for the election. We have already experienced the measures causing a problem with a simple incorporation transaction being carried out entirely for commercial reasons and where there is no intention to gain any tax advantage.

With the Treasury requiring tax funds, in addition to the Government’s spending cuts and being hand tied with the triple lock commitment, CGT is not a protected tax and further changes should be expected. Will the 5% threshold be increased for the share ownership test?

Will an employee have to meet a “full-time working” test?There is a lot of tax potentially at stake with “tinkering” with CGT and, in particular, ER. Along with targeting other groups of taxpayers such as landlords and non-UK domiciles, amendments to CGT may not be seen as potentially vote damaging and a source of significantly increased revenue.

Should you require any further details on the items contained in this guide or tax advice in general, please do not hesitate to contact Harbour Key Limited. If you wish to sign up to our regular update please go to our website.

Harbour Key Limited      

8 June 2015

Always take professional advice when deciding your tax planning or investment strategy. The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.
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