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This year’s Budget was a bit of a cliffhanger, what with not only a new Government, but also a global health crisis, a post-Brexit UK, and the last-minute defenestration of previous Chancellor Sajid Javid, who fell out with the Prime Minister over spending priorities. Nobody was quite sure what the new chancellor, Rishi Sunak, the little-known MP for Richmond in Yorkshire, had in store for us.
What Sunak initially had to offer was a storm in a teacup, causing a furious Twitter backlash after cheerfully tweeting a photo of himself making a pot of Yorkshire Tea for himself and his staff while they got on with Budget preparation.
Having survived his tea break, Sunak got on with the relatively uncontroversial task of setting up the nation’s finances for the next five years. It’s been common knowledge for some time that Boris Johnson was planning to loosen the purse-strings with new spending, but the big question was, how would the new chancellor plan on funding this? Would he borrow, or would he raise taxes? Obviously in these circumstances, chancellors look around for low-hanging fruit, and word on the street was that the first thing in the firing line would be the much-criticised tax break which is entrepreneurs’ relief.
Entrepreneurs’ relief, dubbed ‘the UK’s worst tax break’ by thinktank the Resolution Foundation, was set up by Labour Chancellor Alastair Darling, then much increased by George Osborne. It means that certain types of businesses and business assets, when sold, only attract a 10% rate of taxation on capital gains, rather than potentially much higher rates under capital gains tax.
This little-known tax break, which was originally predicted to cost only £200 million a year, may seem a bit obscure to attract the Chancellor’s attention, but the surprising fact is that entrepreneurs’ relief has cost a startling £22 billion since it was introduced, according to research by the Resolution Foundation. Their research also highlighted just how much the benefits of the relief were skewed towards wealthier groups and individuals.
In the end, Sunak decided against abolishing entrepreneurs’ relief entirely, and went for reducing and limiting the extent of it instead. A previous lifetime limit of £10 million per individual has now been reduced to £1 million. Clearly, the aim of this move is to continue to support smaller entrepreneurs while removing what had increasingly become a benefit to those turning over much larger sums. Since some pundits had predicted the demise of entrepreneurs’ relief entirely, those about to sell a smaller business may be pleased with this outcome.
Unusually, this change kicked in immediately, as of Budget day, which may be bad news for anyone who was halfway through a sale process and planning to complete shortly. However, it’s not like anyone can accuse Sunak of making up the policy on his tea break, since the possibility of abolishing or reviewing entrepreneurs’ relief had already been flagged in the Conservative manifesto. For those who had already completed the sale prior to the Budget on 11 March, the old rates will apply.
It’s worth pointing out that entrepreneurs' relief, like most things in the UK tax system, is quite complex. There are various restrictions on what kind of business ownership does and doesn’t qualify. For example, investment companies aren’t included, and you will have had to have owned the business and/or shares for a minimum of two years to qualify. These criteria haven’t changed, but before you chalk up entrepreneurs’ relief as part of any business calculation, it would probably be a good idea to sit down with someone who really knows the in-and-outs of the situation and check what does and doesn’t meet the criteria.
While the change may be bad news for a few larger investors, especially those planning an asset or share sale in the near future, most busy business owners running an ongoing company may prefer to think about what they’ll gain from the more widespread budget changes and a new commitment to spending on infrastructure.
Part of the money saved by limiting entrepreneurs’ relief will go towards new spending on road and rail transport – and many smaller businesses may be delighted to hear the potholes outside their factory will get fixed, or a new railway station opened nearby, long before they think about selling up and cashing in on their investments.
This was bound to happen sooner or later.
Seems a backwards step