Entrepreneurs’ Relief: benefits under threat?
Recent announcements on Entrepreneurs’ Relief, and their potential impact, may result in the future exit prospects of business owners changing dramatically.
Entrepreneurs’ Relief was introduced in 2008 and is now one of the most popular and generous tax reliefs available in the UK. In essence, it allows business owners to pay a 10% rate of capital gains tax on the disposal of shares or other qualifying assets in that business (as opposed to 18% or 28%).
The relief, which is subject to meeting a number of qualifying conditions, applies to gains up to a maximum lifetime limit of £10 million. The lifetime limit has increased ten-fold since it was first introduced.
Criticisms about the relief have come about following an analysis carried out by the National Audit Office (“NAO”), published in late 2014. This report estimated that the cost in lost revenues due to Entrepreneurs’ Relief rose from around £500 million in 2008/09, to approximately £2.9 billion in 2013/14, greatly outstripping previous forecasts.
The NAO have suggested that the monitoring the economic impact of this tax relief (amongst others) has not been adequate to establish whether it is having a sufficient social or economic impact to justify the loss of revenue to the Treasury.
Entrepreneurs' Relief and EMI options
Many of our readers will be familiar with the tax-advantaged Enterprise Management Incentive (EMI) share option plan, and may have some concerns regarding employee tax treatment if changes to Entrepreneurs’ Relief are implemented.
As a reminder, the EMI is a highly popular plan designed to help small-medium sized businesses reward employees by providing a mechanism for employee share ownership. In 2013 changes were introduced to relax rules surrounding Entrepreneurs’ Relief in relation to EMI, helping more employees benefit from the beneficial 10% tax rate on disposal of shares.
This means that under an EMI option at least 90% of the gain can be delivered as a reward to the employees. In addition, the company can usually claim 100% of the gain on exercising an option as a Corporation Tax deduction.
It is difficult to predict what reforms (if any) could be put in place, both in relation to EMI and otherwise. Senior tax specialists have speculated that the complete removal of the relief is unlikely; however there is a greater likelihood of changes to the lifetime limit and eligibility criteria.
It seems that, with strong cross-party support for employee ownership, it is currently unlikely that any reforms that act to the detriment of employees would be implemented.
Watch this space.