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The Autumn Statement could signal a flurry of business exits

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Not much on the contents of chancellor George Osborne’s Autumn Statement has been released (or leaked) to date. However, it is rumoured that there may be restrictions to Entrepreneurs’ Relief. 

News reports have been circulating, for example within the FT, MoneyWeek and according to tax bloggers like Jolyon Maugham, which suggest that further conditions may be imposed to the eligibility to qualify for Entrepreneurs’ Relief, simply because it is such a costly tax relief for the government. However, it is not clear whether these rumours are “leaks” or whether in fact they are “campaigns” from certain quarters – only time will tell.

Currently, business owners who qualify for Entrepreneurs’ Relief are eligible to pay a reduced rate of capital gains tax (CGT) when they exit. On the first £10m of eligible capital gains made over a lifetime, they pay just ten per cent CGT instead of the usual 28 per cent. To be eligible, the shares or assets being sold need to have been held for a minimum of 12 months, and for share disposals the director/ employee must own at least five per cent of the company’s share capital and voting rights. The rules are relaxed slightly where shares have been acquired through an enterprise management incentive.

There are two obvious reasons why a change to Entrepreneurs’ Relief in the Autumn Statement may transpire. Firstly, in a recent review of all the tax reliefs offered by the government, it was found that this was the most expensive business tax relief to provide (at a cost of £2.9bn) after VAT relief on new property development, which costs £8.05bn. 

To put things further into perspective, R&D tax credits, another generous business tax relief, costs just £1.35bn and will be actively contributing to securing the UK’s future as a technologically advanced and innovative economy. Secondly, the cost of offering Entrepreneurs’ Relief has spiralled to over 500 per cent more than originally forecast – in 2007-2008 when it was originally introduced the National Audit Office estimated the operating cost at £475m.

Read more about Entrepreneurs’ Relief:

VAT relief on new residential builds is unlikely to be removed because the government desperately needs to increase the number of new homes; ER on the other hand could feasibly be quite easily further restricted to contain eligibility. And you can understand the logic. Why incentivise business owners to sell a flourishing business for maximum returns when they could be expanding it further to contribute more to GDP, Treasury revenues and provide a greater number of employment opportunities to the UK’s fast growing population? 

The chancellor may think it makes more sense to incentivise entrepreneurs to start new businesses and could well enhance initiatives like EIS (Enterprise Investment Scheme) instead.

If changes to Entrepreneurs’ Relief do go ahead they will not be the first restrictions to be introduced, as in March the chancellor removed the opportunity for investors and members of a management team who do not individually own the required five per cent personal shareholding, to collectively form a shell management company with at least a ten per cent shareholding, in order to utilise ER.

Depending on what actually transpires in Osborne’s Autumn Statement address, business owners thinking about an exit may well need to bring forward their plans. Let’s hope any new legislation gives those without the right structures in place the time to have a chance of benefitting.

Lesley Stalker is head of tax at accountancy firm RJP.

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