What exactly will Sajid Javid do with Entrepreneurs’ Relief?
While many entrepreneurs are still in celebration mode after the resounding defeat of Jeremy Corbyn, there may still be a nasty surprise waiting for them in the not too distant future. There are strong rumours that the Government is set to scale back Entrepreneurs’ Relief (‘ER’) in the 11 March budget on the basis that (in a paraphrase of Boris Johnson’s words) it makes the staggeringly wealthy more staggeringly wealthy. The converse view is that it would be madness to stifle this valuable entrepreneurial relief just as the UK leaves the EU.
The FT recently reported that Robert Palmer, head of pressure group Tax Justice UK, said the relief was a “massive handout” to business owners when they sell up. “It is a very bad use of government money, because it gives money to those who are already successful and does nothing to help people when they are starting out,” he argued. “If you wanted to help create entrepreneurs this is one of the most inefficient ways of doing it.”
Apparently Sajid Javid, chancellor of the exchequer, is drawing up plans to curb this £2.4 billion per year tax break. The big question on everyone’s lips is what will happen and what can they do about it?
What will the changes be?
This is complete guess work however if I were a gambling man (which I am!) my money would be on the following:
- A wholesale scrapping of the relief would be surprising. This relief is now almost embedded into the culture of what it is to be an entrepreneur and wholesale scrapping would be a big disincentive.
- The lifetime allowance of £10M has always been surprisingly generous, although the original allowance of £1M was probably not generous enough. Expect some kind of cut in this allowance to something around the £5M mark.
- Could they make another attack on ‘money boxing’? This is the practice of building up reserves in a company and receiving capital treatment (and ER) in respect of a sale or liquidation. A few years ago a consultation concluded that this would be too difficult to deal with but I don’t see why. It would be possible to restrict ER to the extent that proceeds relate to amounts that could have been paid as a dividend prior to sale. Javid has a reputation as a man with an eye for detail and so I would expect him to try to attack this aspect of ER.
- The ER rate of 10% is very low and so is the general capital gains tax rate of 20%. It would be very easy to add a few percentage points to both of these rates. I would go for about a 5% increase.
What can we do about it?
When Corbyn was still in with a chance we prepared the Tax Bite below about creating an option to ‘lock in’ lower rates. Entrepreneurs should be considering this kind of planning now.
Also (in the spirit of the above Tax Bite), there may be entrepreneurs who have engaged in share-for-share transactions since 2018/2019 who may want to opt out of the ‘share for share’ tax treatment if the budget goes against them. In certain circumstances it will make sense to crystallise a low rate of tax earlier, rather than face a much bigger hit down the line. This would effectively accelerate the timing of gains to allow them to be taxable at lower rates.
Clearly, anybody who is anticipating a sale after 11 March 2020 should be looking at ways to protect their position. There may be certain planning opportunities (above) which either exist at the moment or which do not have a downside to implement.
Forbes Dawson are an independently owned, tax-only firm offering specialist tax consultancy services to private clients, businesses and professional advisers.