What happened to Entrepreneurs’ Relief?
In his inaugural budget on 11 March 2020, the Chancellor of the Exchequer, Rishi Sunak, announced a radical change to Entrepreneurs’ Relief, which included a reduction in the lifetime allowance and a rebranding of the relief. Our Head of Tax Strategy, Gordon Buist, discusses the detail of the changes below.
A new relief?
No. Confusingly, Entrepreneurs’ Relief will now be known as ‘Business Asset Disposal Relief’, despite the fact that the relief does not apply to the disposal of business assets, but only to a disposal of the business itself, in whole or in part.
The change of name does not have any practical impact on the operation of the relief – it remains a 10 per cent rate of capital gains tax (CGT) on the disposal of a business or part of a business (including shares in a trading company), where various conditions are met.
What has changed?
The most significant change is that the lifetime allowance has been reduced from £10 million to £1 million from 11 March 2020.
This means that any individual who has already claimed Entrepreneurs’ Relief on gains of £1 million or more will no longer qualify for the 10 per cent rate of CGT on future disposals. Similarly, even for those who have never made a claim for the relief previously, only the first £1 million will be taxable at 10 per cent, with the balance of the gain taxable at the main rate, which is currently 20 per cent.
At current rates, the relief is now worth £100,000, down from £1 million at the previous lifetime allowance.
What are the qualifying conditions?
Business Asset Disposal Relief allows individuals to claim relief, by way of applying a 10 per cent rate of capital gains tax to the first £1m of qualifying gains made on the disposal of:
(a) A sole trade, or interest in a trading partnership,
(b) Assets used in a sole trade or trading partnership sold within 3 years of cessation, or
(c) Shares or securities in a personal trading company
The individual must have carried on the sole trade, or been a partner in the trading partnership, for at least two years ending on the date of disposal.
A personal trading company is a company in which the individual:
(a) Owns at least 5 per cent of the ordinary share capital of the company, giving at least 5 per cent of the voting rights and either 5 per cent of the profits available for distribution to shareholders, or 5 per cent of the proceeds receivable on a sale,
(b) Is an officer (director or company secretary) or employee, and
(c) Meets conditions (a) and (b) throughout the period of two years ending on the date of disposal.
A trading company is a company that carries on a trade but does not carry on any substantial investment activities. In this context, substantial is regarded as more than 20% of the activities of the company, measured in the round by reference to turnover, profits and commitment of staff time and resource.
What should I do?
The lifetime allowance is £1 million per individual.
If you own a trading company, you may therefore wish to consider the ownership structure of the company with a view to potentially introducing family members, such as a spouse, into the business. This could potentially allow for gains on a disposal of up to £2 million to be subject to the 10 per cent rate of tax by allowing your spouse to utilise their lifetime allowance too.
Please contact me email@example.com or @CondiesTax if you would like to discuss the BAD relief and how it may impact on your tax strategy.