Apr 20

Entrepreneurs’ Relief – an update

Written by Katie Watts
Associate

DDI: 01423 724624
M: 07543 307799
E: katie.watts@raworths.co.uk

The Budget 2020 on 11 March seems like a lifetime ago, despite being only last month. One of the biggest changes introduced by the Budget was to Entrepreneurs’ Relief, which, if this was a relief you were relying on, could cause immediate CGT issues.

Capital Gains Tax (CGT) is charged on chargeable gains at a rate of 20% (or 28% for gains on residential property). Entrepreneurs’ Relief reduces the CGT rate to 10% on the disposal of shares, or all or part of a business provided certain criteria, including ownership criteria, are met. Until 10 March 2020, Entrepreneur’s Relief was subject to a lifetime limit of £10 million of qualifying gains. From 11 March 2020, this lifetime limit is reduced drastically to £1 million.

This is a huge reduction and for many disposals could result in twice the amount of CGT being due. Given this significant increase in potential CGT, the need for proper advice well in advance of any sale or disposal of shares or other business assets is as important as ever.

Such longer-term planning can also be beneficial from an inheritance tax perspective to minimise potential inheritance tax (IHT) charges on your death.

Once you have reached your Entrepreneurs’ Relief limit of £1 million, there are other tax planning alternatives you could consider such as:

1. Gift the assets to charity prior to any sale – either an existing charity or by setting up your own charitable trust. Charities are exempt from paying CGT. If you are setting up your own charitable trust, there are various requirements which have to be fulfilled, such as ensuring the objects of the trust are charitable and comply with the requirements set out on the Charities Act 2011.
2. Gift the business assets into a trust or to an individual (who is not your spouse or minor child) and elect for CGT holdover relief to apply. This means that you will not pay CGT immediately on the gift, but the recipient will then pay the CGT when they dispose of the business assets in the future. A lifetime trust can be a useful way to provide a benefit your family and future generations. However, lifetime gifts into trust could result in immediate IHT consequences.
3. Reinvest the proceeds of sale in another business and elect for roll-over relief to apply. Roll-over relief defers any CGT charge until the business is eventually sold.

Options 1 and 2 above both rely on you being able to make a gift of the asset and receive no benefit from it personally going forward.

This list is not exhaustive and you should speak to your solicitor and financial adviser to discuss whether any of these options works for you. At Raworths we have a wide range of experience in succession planning for both individuals and businesses and will work closely with you and your financial adviser to put the best plan in place for you.

Due to the current coronavirus pandemic, our teams are working remotely.  We are continuing to operate and although we cannot have face to face meetings, we can take instructions over the phone, by email or using various types of video conferencing. Ensuring that your personal affairs are up to date and in good order is particularly important in these uncertain times so if there is anything you would like to discuss or review, please get in touch.

Published on 16 April 2020