Entrepreneurs’ Relief: “…I shall use my largest scales…”

Piggy bankIt seems somewhat appropriate, in the month of Terry Jones’ passing, to reference this quote from Monty Python & The Holy Grail. At the time, his character – the pompous knight Sir Belvedere - was about to use the scales to oversee a witch trial. They might now come in handy again, in determining whether the writing is on the wall for Entrepreneurs Relief.

From experience, I am loathe to get clients to do something they were not already planning to do, to take advantage of some tax break or another that it has been leaked might be about to be withdrawn. Too often, the effects of the advertised withdrawal are not as terminal as predicted, and acting precipitously can therefore often prove to have been the wrong advice.

However, that is quite different from a situation where a client is already in the throes of doing something which would take advantage of the tax break that is under threat, and is doing so primarily for commercial reasons, rather than tax advantages.

Against that background, it is worth pointing out that entrepreneurs’ relief, which charges certain capital gains at a maximum of 10%, has recently come under scrutiny:

  1. Boris Johnson has suggested that the Treasury is against entrepreneurs’ relief, fuelling speculation that it might be axed in the budget;
  2. Page 34 of the Conservative manifesto, in a section headed ‘Backing entrepreneurs and innovation’ goes on to say: “…some measures haven’t fully delivered on their objectives. So, we will review and reform Entrepreneurs’ Relief...”

The budget speech is taking place on 11th March 2020, and often any changes announced in the budget have effect from budget day, even though the prevailing legislation only receives Royal Assent months later.

It is worth saying that the ‘trigger’ for capital gains tax is the date that a contract becomes ‘unconditionally binding’.

Example 1: you are selling business premises. The date the transaction is deemed to take place is the date of exchange rather than completion, as that is the date you become contractually bound to sell, and any failure to complete can be subject to legal action as a breach of contract.

Example 2: you are selling shares in a limited company. The tax point would be the date the contract is signed by both parties, not the date the proceeds are received.

Consequently, prompt action would guarantee an entitlement to entrepreneurs’ relief based on current rules, which might not be available after the budget. On the other hand, there is no certainty that any amendments to entrepreneurs’ relief will take immediate effect, will affect everyone in the same way. Acting now to secure entrepreneurs’ relief in its current guise might be all well and good, but that should be viewed against whether a deal which is commercially beneficial to the seller can be negotiated in that timescale, and the fact that doing so before 11th March 2020 might actually transpire to achieve a better result than doing something. Indeed, it may also be worth referencing an article in the 02/02/2020 Sunday Times, that suggested Sajid Javid, the Chancellor of the Exchequer, is considering reducing the lifetime cap from £10m to £1m, but potentially only in respect of new businesses.

Tax practitioners are well-versed in recognising those potentially complimentary sayings of ‘don’t let the tax tail wag the dog’ and ‘act now, repent at leisure’. It remains to be seen whether those apply now. However, perhaps the most sensible advice we could give is to repeat BT’s adage ‘it’s good to talk’. Only by assessing your own circumstances in these uncertain times could we help you determine the right course of action for you. The last thing I would want is to routinely recommend taking action now, and then – after the budget in six weeks’ time - have someone say: He's not the Messiah. He's a very naughty boy!"

Author: Graeme Lovell, Tax Director, Langdowns DFK