Budget raid on entrepreneurs’ relief but 10% tax rate remains for now

The Chancellor staged a raid on the tax break for building a business yesterday as he slashed the lifetime limit on entrepreneurs’ relief from £10million to £1million.

The move will hit serial entrepreneurs and those who have turned start-ups into medium-sized businesses and has been made due to fears that too much of the tax break goes to investors and contractors.

But some small business owners breathed a sigh of relief as the special 10 per cent capital gains tax rate was kept intact, rather than being removed as many feared.

The controversial cut reduces by 90 per cent the amount of profit an individual can claim entrepreneur’s relief on over their lifetime. 

Instead of scrapping the Entrepreneurs’ Relief, Chancellor Rishi Sunak has slashed the lifetime limit down to £1m

Rather than being able to pay a special 10 per cent capital gains tax rate on up to £10million worth of profit from selling a business, instead of the standard 20 per cent capital gains tax rate, it will now be limited to £1million of profit. 

Before the Budget move someone using the maximum £10million lifetime limit would have paid £1million in tax, whereas after the change they would pay £1,800,000 – having benefited from a 10 per cent rate on only the first million pounds of profit.

Chancellor of the Exchequer, Rishi Sunak, said in his Budget yesterday that the cut was in response to evidence that the tax break has done little to incentivise entrepreneurial activity and that it has primarily benefited a small number of ‘very affluent taxpayers’. 

He added: ‘This will help to ensure that the tax system is fair and sustainable while leaving over 80 per cent of those using the relief unaffected.’ 

Nimesh Shah, partner at Blick Rothenberg said: ‘It has become viciously complicated in recent years with various rule changes and anti-avoidance measures. Now that the relief is only worth £100,000, surely the rules need to be simplified?”

Entrepreneurs’ relief: Why was it cut? 

Entrepreneurs’ relief is a tax break that allows business owners to pay less capital gains tax when they sell their business and applies to entrepreneurs who’ve managed businesses for two years or more.

It was introduced in 2008, when flat rate capital gains tax replaced the previous system where taper relief rewarded long-term ownership. 

However, a fair chunk of entrepreneurs’ relief goes to those who don’t quite fit the traditional bill of the person who spend a lifetime building a business.

They might instead look like already wealthy serial investors, or contractors rolling up income in their business with the intention of winding it down and taking the cash in a more tax-friendly way.

He added: ‘At a time when UK businesses are facing hugely uncertain futures, it is disappointing that the Government has decided to reduce the Entrepreneurs’ Relief lifetime limit without any review or consultation.’ 

Industry commentators had feared that the Chancellor would announce in the Budget that he would abolish the relief altogether. 

It has been criticised by influential think-tanks the Institute for Fiscal Studies and Resolution Foundation as doing little to encourage people to start a business. They have argued that a tax break would be better targeted at those starting up, than those who have already made big profits on a successful endeavour.

Mr Sunak said the government was at in favour of reforming entrepreneurs’ relief while ‘continuing to support the vast majority of entrepreneurs and increasing tax incentives for businesses investing in structures and buildings and R&D.

He also announced that investment into R&D would be increased to £22billion a year.  

Paul Falvey at accountancy and business advisory firm BDO says: ‘Mr Sunak’s plan to reduce the scope of from £10million to £1million is a surprise as many expected entrepreneurs’ relief to be scrapped totally.

‘Whilst it is encouraging that entrepreneurs’ relief will still exist in a scaled back guise, this change will impact a significant number of entrepreneurially spirited business owners.

 Scrapping entrepreneurs’ relief would destroy the retirements of thousands of business owners.

 Mike Cherry, Federation of Small Businesses

‘Businesses will be pleased that Research and Development (R&D) relief will be more generous moving forward, however HMRC have indicated they will scrutinise claims more closely, so businesses must ensure their submissions are within the intended scope.’

Sunak said he would not abolish what some called the ‘UK’s worst tax break’, as there were some who still benefitted from it. 

How hard will this hit small business?

The Chancellor branded the tax break as ‘expensive and ineffective’. 

Earlier this month, the Federation of Small Businesses showed that the annual cost of the incentive to the Treasury could be reduced by three-quarters if it was concentrated on business sales of under £1million.

In the financial year 2017-18, entrepreneurs’ relief cost the Treasury £2.3 billion. Of the 43,000 individuals that made use of the incentive, 38,000 claimed relief on business sales of under £1 million, coming at a cost of only £600 million to the Treasury.

Before today’s announcement the FSB’s Mike Cherry warned: ‘Scrapping entrepreneurs’ relief would destroy the retirements of thousands of business owners. 

‘The Conservative manifesto committed this Government to reviewing and reforming this incentive, not scrapping it entirely. 

‘The Conservatives should keep their promises – it’s a question of trust.’

However, some believe this move brings the government one step closer to scrapping entrepreneurs’ relief altogether. 

Svenja Keller, head of wealth planning, Killik & Co adds: ‘Sunak has announced a simple change to the ER limit so as not to discourage genuine entrepreneurs and support creativity, with 80 per cent of small business owners unaffected – but it’s very effective and could have a significant impact; lowering the limit by £9million is a big change.

‘However, isn’t such a large reduction similar to an abolishment? Whether this could happen next remains to be seen.’

Small Business Essentials


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