Chris Thorpe takes a look at the relief formerly known as entrepreneurs’ relief following the budget in March 2020.
Prior to the budget in March 2020, the rumour mill about the future of entrepreneurs’ relief (ER) for capital gains tax (CGT) was red hot; talk of restrictions and even abolition in order to fulfil the government’s election spending promises.
As it transpired, ER was not abolished. However, for some individuals it might as well have been, as its effectiveness has potentially been significantly blunted.
What’s in a name?
The first change to point out is an interesting one – the name. From April 2020, it is no longer named ER – it is now, rather blandly, known as ‘business asset disposal relief’ (BADR).
Straight away it sounds like the government does not like entrepreneurs or any such connotations.
Lifetime limit, etc
One of the features of ER was that the reduced 10% CGT rate applied to the first £10 million of gains in one’s lifetime; in the budget that maximum was immediately (i.e. for disposals on or after 11 March 2020) reduced to £1 million, which it was originally when ER was first introduced in 2008.
The point to emphasise is that this is a lifetime, not an annual, limit. Therefore, if by 11 March 2020 someone has already claimed ER on gains of over £1 million, there will be no BADR available henceforth.
On top of that, the budget also introduced anti-forestalling measures, which sought to prevent vendors from bringing forward an exchange of contracts whilst staggering its completion purely to take advantage of the old £10 million limit. If a contract is exchanged before the day of the budget (to trigger the tax point) but completion takes place later, the parties must show that the purpose behind the staggered dates was not to avoid tax, or (if the parties are connected) that the reason behind it was wholly commercial. If exchange and completion is on a date before budget day, the disposal will be subject to the old £10 million limit.
The other criteria for BADR remain the same, i.e. being an officer or employee for 24 months prior to sale, as well as holding at least 5% of the ordinary share capital and voting rights and a right to at least 5% of the distributable profits and net assets upon winding up in that time. There is a fall-back position whereby if a shareholder cannot meet the dividend/net asset criterion, then provided the shareholder has a right to at least 5% of the proceeds of the company’s sale at the time of disposal that will suffice.
What does the future hold?
Before the budget, an argument behind the change to ER was that only a few very wealthy individuals were benefitting from it and that it wasn’t providing people with enough of an incentive to invest in their own businesses at the start, rather than just the end. Interestingly, no change was made to the £10 million limit for investors’ relief, which is similar to BADR except for the fact it is aimed at external investors who are not officers/employees. It seems a little odd that the people who work in the business and toil away to build it up only benefit from a £1 million limit, whereas a passive investor keeps the old £10 million. Whether this will change going forward to align with BADR is anyone’s guess.
However, given the fallout from the coronavirus and the likely recession that will follow, the government may wish to retain the incentive for external investors; but anyone would think they would also want to retain a competitive incentive for grafters to build up their own business and enjoy the fruits of their labours upon retirement.
Conclusion
Restoring the original 2008 ER lifetime limit to BADR may seem like a relatively small change – it was certainly less of a change than many feared. However, the change of name seems a little ominous and only time will tell whether it will strike the right balance between rewarding risk-takers and replenishing HM’s Treasury.
