Entrepreneurs’ Relief – time to take action

27th November, 2019

Entrepreneurs’ Relief – time to take action

Could ER be scrapped?

Former Permanent Secretary of HMRC, Sir Edward Troup, has recently called on the Government to scrap Entrepreneurs’ Relief (ER). ER is the relief available that reduces the Capital Gains Tax rate to 10% for those that qualify when disposing of a company. This comes following a report from the Institute for Fiscal Studies that suggests ER costs the government £2.4bn a year and that “lower rates of tax on business income produce large benefits that disproportionately accrue to the rich”. The claim is that the tax break does not achieve what it set out to do.

Sir Edward, previously a special adviser to Kenneth Clarke when he served as Chancellor of the Exchequer and a former Director General in HM Treasury, recently claimed that ER has “minimal impact on encouraging entrepreneurship in the UK”. In a recent Guardian article (6/11/19) he said, “whichever party won the general election on 12 December should abolish the entrepreneurs’ relief ”.

It could be suggested that as Sir Edward is no longer a public sector adviser his opinion carries less weight however, his influence cannot be ignored. As someone who has sat at the very heart of the machinery of Government, there can be little doubt that his comments are heard and noted by the higher reaches of the Civil Service. This implies that there is a real possibility a policy to remove or amend ER could appear in the next budget.

Potential changes

Should that happen, a number of options are available to a new Government who will have elections promises it must fulfil.

The government could tighten up the rules around qualification, ensuring that fewer people are eligible, perhaps by increasing the length of time the asset must be held or changing the ownership thresholds. However, adding more complication to the existing already complicated ER rules may not be desirable. What people require in the current climate is tax certainty.

They could achieve this by abolishing it completely, subjecting such disposals to the normal rates of capital gains which are already a generous 20% compared to the 40% income tax rate. 

Varying the ER tax rate is also an option as even a 2% or 3% rise will have a significant impact on the tax paid by entrepreneurs on disposal and the Treasury’s coffers. 

This is yet another aspect of taxation to consider for those getting ready for contracting life post 5 April 2020 when the new IR35 legislation takes effect.

Closing PSCs in light of IR35

IR35 is compelling contractors and even end clients to change their working practices. For those who are currently working by way of a PSC, if this continues post April 2020 the end-client will need to determine whether your assignment is inside or outside of IR35 prior to the changes taking effect which carries a lot of risk. Contractors are therefore either going into full time employment, working through an umbrella or moving to something similar.

Limited companies will no longer be required, and therefore the next step is to close down your PSC. With the impending risk of entrepreneurs’ relief being abolished, closing down your company should be considered sooner rather than later.

MVLs and applying Entrepreneurs’ Relief

If you have “cash” of more than £25,000, consider closing down your company by way of Members Voluntary Liquidation (MVL). This allows you to extract the assets as capital rather than income which would be subject to Capital Gains Tax (CGT) rather than the higher rate of income tax. This would depend on certain requirements being met. In some of these instances entrepreneur’s relief will be available which could reduce your liability significantly.

At present, Entrepreneurs Relief is available to individuals who realise qualifying gains. Its application reduces the CGT rate to 10% from 20%, up to a lifetime limit of £10 million.

Time to take action

ER can be a sensible relief for planning your affairs, but it is also complex and failure to prepare can substantially damage your position. As specialists in this field, WTT can review your circumstances to decide if a claim for Entrepreneurs Relief is likely to succeed. We can then manage the entire process of liquidating your PSC. Traditionally, the liquidation from start to finish takes six months, so with possible changes on the horizon we urge those considering this to take steps to explore this further now.

For a free consultation on this or to talk through any questions you have please call us on 020 3468 0000 or email info@wttconsulting.co.uk