As our brand new chancellor of the exchequer Rishi Sunak prepares for his first Budget, history suggests that if the Government wants to make unpopular changes to tax we should expect them this year.
One area that may be attacked is Entrepreneurs’ Relief (ER), which reduces the tax paid by people selling a business to 10% from the standard rate of 20%. This rate compares very favourably, for example, to the tax rates which apply to employment or dividend income.
Supporters argue that people who invest their life and effort into a business, often at great personal financial risk, creating jobs and wealth, should be rewarded with a lower tax rate at the end, and that the tax system should encourage entrepreneurs of the future. On the other hand, those who benefit from ER are often already amongst the wealthiest in society and end up paying a lower rate of tax than workers on very modest incomes. Boris Johnson reportedly said recently that the Treasury views ER as making “staggeringly rich people” richer still.
In October 2019, the IFS published a study suggesting that low rates of capital gains tax on sales of businesses do not boost investment, and ER costs the Government £2.4bn a year. Of course, such reports are based on statistics that do not take into account for example, that some business sales might not happen without this lower rate.
The options for Mr Sunak include introducing further restrictions or tightening the qualifying conditions for ER, increasing the existing 10% rate, or even scrapping ER entirely. We also do not know whether the Government intends to increase the 20% base rate of capital gains tax, which could result in a double hit to entrepreneurs, nor do we know when any changes might take effect.
This brings uncertainty for those in the process of selling or considering a sale of their business, and here at Howes Percival we are receiving enquiries from clients. There is, of course, the possibility that no changes will be made and for now the status-quo is maintained. However, it may still be prudent to start your tax planning early as the future direction of travel in respect of restricting this relief appears to have been set. Please be aware, tax planning that has no reason other than avoiding tax is often risky and can promote HMRC enquiry. Any action must be considered carefully and will likely form part of wider commercial and tax planning advice.
If you have any queries relating to the sale of your business or the contents of this article, please do not hesitate to contact Daniel Banton or Oliver Pritchard.
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