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The great race to exploit Entrepreneurs’ Relief

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During the coming months the manifestos and future plans of all competing political parties will be laid out ahead of the 7 May general election. We will be told how each party will promote the interests of British businesses, cut red tape and help with borrowing.

However, during that period a troupe of worried entrepreneurs and business owners will be frantically putting their companies on the market – fearing the removal of a tax relief that makes cashing out all that more lucrative.

The tax in question is Entrepreneurs’ Relief, which gives a lifetime allowance of £10m gain, taxed at a the reduced rate of 10 per cent. The relief was capped by the former government, under Gordon Brown, at £2m, but has been progressively increased by the coalition government.

To qualify, sellers must be a sole trade or business partner, have owned the company for at least one year before the date of sale and sell or dispose business assets within three years of  selling or closing the business.

In a piece written at this time last year, Livingstone partner Jeremy Furniss revealed that a “potential threat” to Entrepreneurs’ Relief posed by a Labour or Liberal-Labour coalition government was now motivating entrepreneurs to consider an exit with a “more acute sense of urgency”.

Speaking to Real Business now, Lord Leigh of Hurley, senior partner at Cavendish Corporate Finance and member of the House of Lords, said: “My hunch is that a Tory (as apposed to coalition) government would raise the cap or even abolish it, whereas a Labour government might well go back to £2m as part of its anti-business rhetoric to appease the unions.

“They have already announced plans to force business owners to ask all employees if they would like to buy their business and give them a two-month window to do this – so depriving the owner of the right to decide who they want to be the buyer of their own business.”

Read more about Entrepreneurs’ Relief:

Lord Leigh has noticed a surge of business owners approaching Cavendish, interested in considering a sale process because of a fear of losing out on Entrepreneurs’ Relief. The firm has advised on a “record” 22 company sales in the last 12 months.

Compared to the normal rate of Capital Gains Tax (CGT) of 18 or 28 per cent, Entrepreneurs’ Relief offers an appetising and rewarding tax break for those willing to start, grow and sell a company.

On 26 February, Lord Leigh will be making an oral question in the House of Lords relating to the impact Entrepreneurs’ Relief has had on the UK economy. However, a report carried out by the National Audit Office in November 2014 showed that Entrepreneurs’ Relief cost some £3bn during 2013/14, up from £475m in 2007/08. But can you really put a price on the value of entrepreneurship, business creation and job growth?

If Britain and the government wants to continue with a goal of making the nation the best place to start, run and grow a business then the incentives need to be there. From lowering corporation tax to part-funding early hires, and from broadening the scope of investment incentives to further strengthening R&D tax credits, the cherry on the top of the cake is Entrepreneurs’ Relief. It provides light at the end of the tunnel in the sense that entrepreneurs know they are going to reap all the benefits after those years of hard work. 

Some political parties may be keen about redistribution wealth, but how much wealth will there really be if you discourage enterprise?

Whatever the result come 7 May, we’re likely to an increasing number of business owners get sale wheels in motion to make sure the carpet isn’t ripped from beneath them.

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