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Time to seek advice if you are thinking of selling your business

The UK General Election puts a spotlight on Entrepreneurs’ Relief (ER) that could either see it reformed or abolished

 Changes to the prevailing tax regime are always unsettling for business owners, no more so than during an election, when taxation policies invariably dominate. But for business owners—especially those looking to dispose of their business in the near future—now is the time to potentially accelerate that process as ER is firmly in the spotlight. This is according to Duff & Phelps, the global advisor that protects, restores and maximises value for clients.

For many years, business owners have been able to take advantage of ER which allows company directors and employees to benefit from a 10% tax rate on capital gains if certain conditions are met at the time of sale.

There are many reasons why entrepreneurs may wish to sell their business. Irrespective of the reason, business owners can benefit from a reduced tax rate on their capital gain by utilising ER up to a maximum lifetime limit of £10m.

Eddie Bines, Director, Restructuring Advisory, Duff& Phelps, stated: “It’s called entrepreneurs’ relief for a reason as business owners can reduce the amount of Capital Gains Tax payable to a rate of 10% when they dispose of all or part of their business. It is available to sole traders or partners and company directors and employees holding 5% or more in shareholdings.

“Now that the main political parties have outlined their own tax policies, it seems this election more than any other has put the continued existence of this relief in jeopardy. With the wealthy—and the contribution they make to the broader community—now under debate, as never before – it is no surprise that ER is being actively looked at by both main parties.”

What are the two main parties saying?

Labour plans to increase Corporation Tax to 26% by April 2023, while also harmonising Capital Gains Tax rates with Income Tax and it intends to abolish ER altogether. It also intends to “consult on a better form of support for entrepreneurs which is not largely just a handout for a small number of people.”

Over the past few years, the Conservatives have already made a number of changes to the UK tax regime, but the former Chancellor, Philip Hammond, rejected calls to scrap ER back in 2018. That said, he oversaw a tightening of the rules around qualification as well as introduced a number of technical changes to crack down on abuse.

From the beginning of this tax year, entrepreneurs must own their business for two years before selling in order to qualify for relief, up from the previous one year. From 29 October 2018 entrepreneurs also have to own shares entitling them to 5% of distributable profits of the business and net assets of the company (as opposed to simply voting rights) in order to qualify.

The Conservative Manifesto recognises these changes and comments: “some (tax) measures haven’t fully delivered on their objectives” and as a result the Conservatives also propose to “review and reform ER.” To date, no detailed plans nor indeed a timetable have been proposed.

Bines continued: “It is perhaps not surprising that, from a tax perspective, there is clear water between the two main political parties. However, both Labour and Conservative are intending to make changes to the ER regime. Any overnight changes will cause huge concern for those entrepreneurs who genuinely believed they qualified for ER but no longer do so.

“Any changes that are made to this tax relief will come at a price and at the expense of a thriving entrepreneurial community. There is no doubt that the availability of ER over recent years has taken a leading role in supporting economic growth. But with such a degree of uncertainty and a highly volatile electorate, now is not necessarily the time to sit back and play the waiting game. We encourage all business owners thinking about whether it is appropriate to accelerate the sale and/or winding up of their business, or even undertaking succession planning, to contact us, mitigate the risk and lock in the 10% tax rate now,” Bines concluded.