Budget 2020 – Reduction in Entrepreneurs’ Relief

The headline change is that the individual lifetime allowance for Entrepreneurs’ Relief (‘ER’) has been reduced, with immediate effect on Budget Day, 11 March, from £10million to £1million.

The government’s manifesto stated that there would be a reform and review of this relief, so a reduction in the limit was not entirely unexpected, though the magnitude of the reduction and the immediate implementation was a surprise.

Entrepreneurs’ Relief (ER) is targeted at directors and employees of companies who own at least 5% of the ordinary share capital in the company, provided other minimum criteria are also met and enables them the pay a reduced rate of 10% on the capital gain.

For owners of small businesses making gains of less than £1m, the reduction in the lifetime allowance will have no impact.  However, for individuals making gains above £1m, then 20% tax will be payable on the excess above £1m.

Anti-forestalling provisions

To complement the headline change to ER, the Budget also announced some measures to counter steps that taxpayers may have taken prior to Budget Day to “lock in” or “bank” ER in advance of any changes being announced.

Where contracts were entered into prior to Budget Day, but will only complete on or after Budget Day, then the reduced lifetime limit of £1m will apply unless:

• the parties to the contract demonstrate that they did not enter into the contract to obtain a tax advantage by reason of the timing rule in s28 TCGA 1992, and
• where the parties are connected, that the contract was entered into for wholly commercial reasons

Where the taxpayer believes that these tests are met, they have to make an additional claim as well as the normal claim to ER.

In addition, where shares have been exchanged for those in another company between 6 April 2019 and 10 March 2020 and both companies are owned or controlled by substantially the same persons, or shareholders have a greater percentage shareholding in the acquiring company and continue to meet the qualifying criteria for ER, then the following applies.

If an election is made under section 169Q on or after 11 March 2020, then the share disposal is treated as taking place at the time of the election and not at the time of the share-for-share exchange, meaning that the reduced lifetime limit of £1m will apply.

These anti-forestalling provisions will be of widespread application and the onus will be on taxpayers to demonstrate that the timing of transactions was for commercial reasons and not to “lock in” or “bank” ER.

If you wish to discuss anything, please contact one of our Chartered Tax Advisers.

Our Budget Summary provides an overview of the key announcements arising from the Chancellor’s speech. However, it also looks beyond the headlines and offers details on the less-publicised changes that are most likely to have an impact upon your business and your personal finances.