What you need to know
The Labour Party has also pledged to crack down on what they call a “rigged system” and specifically stated that they will abolish entrepreneurs relief.
This was left to Sir Edward Troup, former head of HMRC, who suggested that the scheme should be scrapped as it was costing the country over £2bn a year in lost tax revenue.
His intervention followed an IFS report that revealed more than 9,000 people collected over £1m in capital gains tax in the last financial year paying £5.1bn tax on £33.7bn of capital gains tax (CGT) income as a result.
This worked out as an average tax rate of 14.8%, which is lower than the basic income tax rate of 20%.
Sir Edward said: “This inequity would be almost entirely eliminated by the abolition of entrepreneur’s relief. It gives £2bn CGT savings every year to those who have already made their gains and provides no incentive for real entrepreneurship.”
“The point of entrepreneurs’ relief is that it rewards you when you make a lot of money. There are lots of things getting in the way of people becoming great entrepreneurs in this country, but the fear of tax on future gains is not one of them.”
“There’s a very strong case for whichever party wins the election to ramp down entrepreneurs’ relief immediately.”
Entrepreneurs’ Relief is used to pay less capital gains tax when people sell (or dispose of) part of or all of their business. Used appropriately, they will pay tax at 10% on all gains on qualifying assets which is less than if the money was claimed as a salary.
In order to qualify for entrepreneurs’ relief, the recipient must be a shareholder in a close company and have owned it (or part of it) for at least two years before it’s sold. This also applies if the business is being closed but assets must be disposed of within three years in order to qualify for relief.
History of a benefit
First introduced by then Chancellor Gordon Brown in 2008, it was limited to £1m per person but the cap has increased several times and was raised to £10m in 2011 by the coalition government.
HMRC tightened its rules in 2016 to narrow the circumstances under which entrepreneurs’ relief could be claimed in a members voluntary liquidation scenario.
April 2020 already looks like it’s going to be a significant month of financial changes as new IR35 legislation takes effect and HMRC due to regain its preferential creditor status.
Changes to entrepreneurs relief or other business taxes will only add to a dynamically altered landscape.
Many businesses looking to close or liquidate in an orderly fashion have faced unexpected hurdles in their attempts to claim ER because of the various derogations and complications that exist.
The easiest thing to do would be to contact us and arrange a free initial consultation with one of our qualified expert advisors.
We’ll be able to properly advise you on what you’re entitled to claim for and other benefits you might be able to realise from your company in the most efficient and effective ways to access them.