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The Entrepreneur and the Budget

Posted on 24th February, 2020

Sajid Javid previously announced that 11 March was the date of this year’s budget however, following the recent cabinet reshuffle, uncertainty loomed as to whether the date was to be delayed to allow the new Chancellor, Rishi Sunak, more time to prepare.

It has now been confirmed that 11 March will remain as 2020’s budget day, meaning Rishi Sunak has three weeks to piece together a fresh tax and spending programme for the country.

It is important to consider the effects which the impending budget day may have on UK businesses as in this new year, we have entered a new decade and are currently in a period of transition in relation to the European Union meaning many entrepreneurs may be looking to dispose of the company they have built up over the years.

It has been reported that Boris Johnson has signalled that he plans to eliminate entrepreneur’s relief. It is claimed Johnson stated the rate is helping people who are already ‘staggeringly rich’ to become even richer. Additionally, in its 2019 election manifesto the Conservative party pledged to review the rate. It is therefore likely that some form of action will be taken on 11 March and these proposed actions will ultimately affect the entrepreneurial business owner.

What is Entrepreneurs Relief?

Entrepreneurs relief is often considered a valuable tool for business owners, whereby they can minimise their tax payable on a disposal of their business. It allows entrepreneurs to pay a lower rate of 10 per cent of capital gains tax instead of the usual 20 per cent, on the first £10m of gains.

The 10 per cent rate is applied regardless of income level and there are no limits as to how many times it can be claimed within the £10m lifetime allowance.

The relief is subject to the following conditions:

  • The business must have been trading in the 24 months leading up to the date which the shares were sold; and
  • The person disposing of the shares has to be an office or employee of the business in question; and
  • The person disposing of the shares has to own at least 5% of the ordinary share capital of the business.

Over the years there have been numerous legal cases that have impacted these conditions and therefore a rigorous review of qualification, with an account, for the relief is advised.

It is common for us to find clients benefitting from this relief when dealing with disposals of companies and when businesses are frequently sold between hundreds of thousands of pounds and millions of pounds, a substantial amount of money is saved. Indeed, it has been reported that in 2018 the relief saved company owners and investors £2.4 billion – quite a substantial amount!

Many tax experts have stated that the policy is unlikely to be eliminated and instead they expect reforms, such as reducing the lifetime allowance to £1m as opposed to the current £10m restriction.

What this means

If you have plans to sell a business that you have built up, these announcements leave you with a potentially limited amount of time in which a disposal can be achieved and the current standing of the relief be utilised. In addition to the speculation of changes, it is not clear when any changes to the relief would come into effect. It therefore appears that the days of making use of the relief are numbered.

If you’re looking to sell up or have money sitting in your business, then you may need to act soon and be proactive in light of above.

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