Derek Gemmell: New dawn for entrepreneurs’ relief after Budget

Derek Gemmell, Head of Anderson Anderson & Brown’s Entrepreneurial Tax team (‘E2’) considers the impact on Entrepreneurs Relief of Rishi Sunak’s Budget

Derek Gemmell is head of the Entrepreneurial Tax Team at Anderson Anderson & Brown

For a disposal on or after 11 March 2020, Rishi Sunak’s Budget Announcement has significantly reduced the worth of Entrepreneurs’ Relief (‘ER’).

ER reduces Capital Gains Tax (CGT) from 20% to 10% where business owners dispose of all or part of a business or assets used in a business or shares in a trading business.

The announced change reduces the lifetime limit of gains on which ER can be claimed from £10m to £1m, the result being that the 10% rate of CGT is only worth £100,000 to an individual instead of £1m over a lifetime of gains.

Having considered the change I have concerns that wealthy individuals may lose their appetite for providing equity support to growing businesses. In recent times, these investors have replaced traditional bank funding for high growth businesses and the impact of a doubling of their tax on successful gains may be damaging.

For example, will such investors require a greater return that has typically been seen? Will they request a greater shareholding to compensate for the additional tax they will suffer? If this is the case, it is possible that more growing businesses will fall over as funding will not be available at the right price or entrepreneurs will risk their businesses being underfunded to prevent dilution. This cannot be good for UK business.

I noted with interest the Chancellor’s reference to ER not being a driver when establishing business ventures. This I can understand for first business ventures but from experience most entrepreneurs have serial ventures and almost all see business structuring to achieve ER as a fundamental objective for their later ventures particularly as many will need external equity funding as mentioned above. Therefore, many will feel the change unjust and fiscally unsupportive as they will now face a 100% increase to their tax liability if they sell their business and a new hurdle to sourcing funding.

One does also wonder whether successful entrepreneurs looking to establish and grow a new venture will look to other tax reliefs to replace the lost benefit of ER. Reliefs such as Seed EIS, EIS and Investors Relief may become more in vogue.

However, I do commend Mr Sunak for not scrapping this valuable relief as entrepreneurs fully deserve reward for the risk they embrace when establishing new businesses, creating jobs for others and collecting taxes for HMRC to the benefit of the UK. Additionally, with ER still available growing businesses will still be able to offer share incentives to retain management that are key to delivering success.

Lastly, with a CGT rate of just 20%, the reduction in the value of ER is not as material as it may have been in 15/16 when the CGT rate was at 28%. Hopefully this ER amendment will not be followed by a rise in the rate of CGT as this would have a more significant effect on both Entrepreneurs and individuals providing growth funding in the form of a share investment.