This article examines the impact of the 90% cut in Entrepreneurs’ relief after the March 2020 budget. This change came into effect on 11 March 2020, the day of the budget.
Apart from businesses with a net worth of under £1 million, the reduction of entrepreneurs’ relief from £10 million to £1 million is bound to cause serious headaches for retiring entrepreneurs and qualifying investors who plan to dispose of their investments or businesses on or after 11 March 2020.
The government anticipates that the reduction in the entrepreneurs relief lifetime limit could impact 9,000 individuals who dispose of all or part of their business; individuals who dispose of share in their personal company and trustees who dispose of business assets, with gains above the new lifetime limit. Further, they estimate that the majority of the cost of Entrepreneurs’ Relief is generated by a small minority of very affluent taxpayers’ gains.
Assuming an affluent entrepreneur makes a qualifying disposal of £10 million, this would give rise to capital gains tax liabilities post- and pre- 11 March 2020 as follows:
Capital Gains Tax Liability – Post 11 March 2020
£1,000,000 @ 10% = £100,000
£9,000,000 @ an assumed marginal rate of tax, of say 40% = £3,600,000
Total CGT liability = £3,700,000
Capital Gains Tax Liability – Pre 11 March 2020
£10,000,000 @ 10% = £1,000,000
Total CGT liability = £1,000,000
Extracting value prior to disposing business assets
Entrepreneurs are now faced with complex tax strategies to extract value prior to disposing their business interests.
Pensions lifetime allowance
Those with time on their hands before retirement may want to consider making use of their pensions lifetime allowance. The lifetime allowance has been indexed linked for 2020 and 2021 to £1,073,100 and the annual allowance of £40,000 kept the same.
There’s not much leeway here unless you’re still a basic rate payer after utilising the £2,000 dividend allowance.
Inheritance tax planning
Assuming the entrepreneur can survive rolling 7 year periods, using the inheritance tax gift relief may be a useful tax planning strategy.
In all likelihood, entrepreneurs’ relief after the March 2020 budget will become more of a pain than a relief for the affluent few identified as affected by the budget.