personal finance

Entrepreneurs’ tax relief rules tightened

Philip Hammond rejected calls to scrap entrepreneurs’ tax relief but has tightened the rules on the companies that could qualify as well as introducing an immediate technical change to crack down on abuses.

Under entrepreneurs’ tax relief, business owners pay a lower capital gains tax rate of 10 per cent when they sell all or part of their business, compared with a normal rate of 20 per cent.

The chancellor said entrepreneurs were at the “heart of our dynamic economy” but vowed to crack down on abuse of the rules. From 2019, entrepreneurs must own a business for two years before selling in order to qualify for the relief, up from one year currently.

The Treasury said 95 per cent of entrepreneurs would not be affected by the shift, although commentators said it would affect some owners who were planning a sale.

The chancellor also unveiled another surprise change to the rules, which mean many business owners selling their company after the Budget may no longer qualify for relief.

From October 29, entrepreneurs must own shares entitling them to 5 per cent of distributable profits of the business and net assets of the company in order to qualify for entrepreneurs’ relief. Previously, owners of a business had only to own 5 per cent of the share capital of a business and 5 per cent of the voting rights to qualify.

The government said the measure ensured “that the claimant has a true material stake in the business in order to claim entrepreneurs’ relief” and said the test was “characteristic of true entrepreneurial activity.”

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Nimesh Shah, partner at Blick Rothenberg, said: “The overnight change will cause concern for those entrepreneurs who believed they qualified for entrepreneurs’ relief but no longer do so.”

According to the government, the new technical change would generate a small tax revenue of £5m in the 2019-20 tax year, rising to £10m in 2020-21 and £10m in 2021-22.

Worth up to a maximum of £1m for an individual, the relief is claimed by around 50,000 people every year, at an average claim of £8,000 per person.

Advisers said the change in qualifying period would be unlikely to affect genuine entrepreneurs and expressed relief that the chancellor had not gone further in cutting it back.

Jonathan Drysch, associate director of wealth planning at Killik & Co, said: “The truth is that the [change to] entrepreneurs’ relief is unlikely to affect many businesses dissolving with a profit and/or gain, due to the fact that most have probably been trading for over 24 months to get to that position.”

Jenny Tooth, chief executive of the UK Business Angels Association, said: “While this was a challenging period for the government, it is great to know that Budget amendments have not come at the expense of a thriving entrepreneurial community.”

Today’s change follows an extension to the relief that the government announced at November Budget last year, which meant founders who had recently diluted their shareholdings to below 5 per cent after receiving external investment were able to continue receiving relief.

Sam Smith, chief executive of broker FinnCap, said: “We welcomed the extension of the entrepreneurs’ tax relief announced at last year’s Autumn Budget, and are pleased to see no further changes in this year’s budget, as had been rumoured.

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“Making the relief available only to entrepreneurs who have owned their business for over two years should help promote a stronger commitment by owners to their businesses and encourage them to plan for the long term.”


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