The Chancellor of the Exchequer Rishi Sunak has delivered his Budget statement and, as had been widely expected, there were significant changes to Entrepreneurs’ Relief. The lifetime limit on gains eligible for the relief (which applies a reduced rate of capital gains tax of 10%) has been cut from £10m to £1m with effect from 11 March 2020.
Research suggests that Entrepreneurs’ Relief has mainly benefited a small number of affluent taxpayers and has done little to generate additional entrepreneurial activity. It was widely reported that the Treasury shared that view, and considered it to be an expensive and ineffective tax relief.
Many taxpayers had therefore feared that Entrepreneurs’ Relief would be scrapped altogether.
Against that backdrop it seems strange that the lifetime limit was simply reduced from £10m to £1m (instead of reforming the qualifying conditions to make it fit for purpose), although the Government’s view is that most small business owners will still continue to benefit and that 80% of those claiming the relief will be unaffected.
Furthermore, the way in which the Entrepreneurs’ Relief currently interacts with EMI share options should mean that EMI share options remain a valuable method of incentivising employees despite the reduction in the lifetime limit.
On a separate note it was also announced that there would be a review of EMI share options in the future, to ensure that they provide the right support for high-growth companies to recruit and retain the best talent (and, interestingly, whether more companies should be able to use EMI share options).
The cut in the Entrepreneurs’ Relief lifetime limit was accompanied by anti-forestalling rules, which will apply to certain arrangements entered into prior to Budget Day with a view to “locking in” the relief in the expectation that it would be scrapped or curtailed. Taxpayers who exchanged unconditional contracts for a disposal that didn’t complete before 11 March 2020, and others who sought to take advantage of the share-for-share exchange rules for this purpose, ought to consider whether they are caught by the anti-forestalling rules.
