Budget 2020 – Entrepreneurs Relief
Entrepreneurs Relief (“ER”) and Enterprise Management Incentives
Clearly, the Treasury have finally had enough of the fact that ER primarily benefited a small number of very affluent taxpayers and, according to the government, has done little to generate additional entrepreneurial activity. Accordingly, they have slashed the lifetime limit for ER from £10 million of “qualifying” capital gains to £1million effective straightaway (i.e. from Budget Day). For disposals made on or after 11 March 2020, to the extent that an individual’s gains exceed the new lifetime limit, they will be liable to CGT at the applicable rate (currently 20%).
Here at RM2, we view that this change in positive terms. Importantly, the government have chosen not to abolish ER entirely. This had been one of the favourite rumours in the run up to Budget day and would have had an unhelpful adverse impact on EMI.
Instead, with the current situation of a reduction of the lifetime limit to £1 million, there is considerable scope for our clients to use EMI to enable EMI option holders to continue to benefit from ER. EMI will continue to be a valuable incentive option and the new, reduced lifetime limit of £1 million is still set at a generous level for the vast majority of EMI option holders, who (depending on their personal circumstances) are still likely to be able to claim ER. The government estimated the change to the lifetime limit will have an impact on only around 120 individuals holding EMI options or shares acquired under EMIs.
ER lifetime limit change also gives boost to EOTs
As a separate but related strand, the reduction of the ER lifetime limit will mean that when considering succession planning, business owners will have even more reason to consider Employee Ownership Trusts for a tax-efficient exit (given the new restriction relating to ER) as opposed to a third party sale or a private equity deal. This is because a sale to an EOT should provide vendors with complete relief from capital gains tax without limit.
As final unrelated point, the government also confirmed that it will undertake a review of the EMI scheme. This review will try to ensure the scheme provides support for high-growth companies to recruit and retain the best talent so they can scale up effectively, and examine whether more companies should be able to access the scheme.
If you have any questions on what the Budget 2020 means for your share schemes give us a call on 0208 949 5522 or email email@example.com and we would be happy to have an initial conversation.