Budget 2020 – Changes to Entrepeneurs’ Relief
The Government have followed through on their manifesto pledge to review Entrepreneurs’ Relief and have reduced the lifetime allowance from £10 million of qualifying gains to £1 million of qualifying gains.
The stated rationale was that the benefit of the relief was focused on the South of England and only a small number of people benefited from the Relief. Also, a statistic was quoted that only one in ten persons who used it said it influenced their behaviour in becoming an Entrepreneur.
We would see this as a missed opportunity to properly focus the relief on true entrepreneurs and to make it a proper successor to Retirement Relief, which it effectively replaced. The same outcome in terms of refocusing the relief could have been achieved by a broad range of other, more considered, alterations.
Whilst this change is politically expedient, it is very easy to foresee that the following will now become common:
- Family companies will become owned amongst a number of family shareholders in a step to multiply the number of shareholders who can qualify for a £1m allowance (e.g. simply having a spouse as a >5% shareholder/director)
- The use of Investors Relief will become more common as it continues to have a £10m lifetime allowance where a 10% tax rate on gains will continue
- Sales to Employee Ownership Trusts, where there is a potential for unlimited values of gains to be taxed at 0%, will become much more common.
All of the above would suggest to us that this is a poorly thought out and rushed change. We expect to see other amendments to other reliefs (e.g. Investors’ Relief) being needed in future years as a result of predictable changes in shareholder behaviour.