The Chancellor, George Osborne, announced in the budget that Entrepreneurs’ Relief is to be increased to £5m. This is welcome news for anyone who is looking to sell their business, especially if it is valued in the £1m-£5m range.
Previously, if someone sold their business for up to £2m then, subject to certain criteria, they only paid 10% capital gains tax (CGT) on the proceeds. The over a-lifetime relief is mainly aimed at long-serving business owners who sell their company in order to fund their retirement. Given that the marginal rate of capital gains tax for higher earners has now risen to 28%, this is a valuable relief. It is important to clarify how the relief works. An entrepreneur can buy and sell businesses making total sale gains of up to £5m over their lifetime and only pay 10% tax. Any unused portion of £5m relief can be used in the next transaction. Of course this does not cushion the entrepreneur against a possible rise from 10% entrepreneur’s rate in the future. However with recent governments recognising the contribution private enterprise makes to the economy, it is likely that the tax rate will remain relatively generous in comparison to non-business asset capital gains or income tax.
Let’s take someone who sells their business for £5 million. Without Entrepreneurs’ Relief, their tax liability would stand at £1,389,900, taking into account their personal CGT allowance. With Entrepreneurs’ Relief at the new threshold, the CGT liability would only be £489,900: a saving of £900,000. In another example that shows the impact of the rise in capital gains tax, lets look at the situation where an owner of a business sells for £10m. In this situation under the old system the tax payable would be £1.64m. With the new relief extended but any excess charged at a higher rate the total tax paid would be £1.89m.
Entrepreneurs’ relief is also available for minority shareholders in a business as long as they have 5% of the shares along with 5% of the voting rights. The disposal has to be a business asset. For more information on how to qualify and what constitutes a business asset please refer to the article Entrepreneurs’ relief – how to qualify.
It should be noted that the personal CGT allowance has been frozen at £10,100.
The Chancellor has given some other tax concessions to business in the form of increased investment relief for plant and machinery, corporation tax reductions, and reductions in employers national insurance contributions.
Given the lower tax burden on UK businesses in comparison to other countries, now is a good time to invest in UK businesses. The current low value of sterling also represents an added opportunity to overseas investors.
In other good news for businesses, the Chancellor announced a staggered fall in the corporation tax from 28% to 24% over four years.