Nick Forsyth looks at changes in Chancellor and the possibility of changes to Entrepreneurs Relief in the Budget
The resignation of Chancellor Sajid Javid gave him the notoriety of being a Chancellor who did not present a budget statement to the House and also made him one of the shortest in Office. His resignation was a surprise, particularly when considering that he and his team were midway through preparations for the scheduled Budget on 11 March, but maybe somewhat inevitable when we learned of the power struggle that has been ongoing for months with Dominic Cummings.
His replacement Rishi Sunak has risen very quickly to the top and like others in the Top Four jobs, excluding Boris Johnson himself, appears to have insufficient experience at this time for such a post. The aim of Number 10 looks to commit spending to geographical areas to appease new voters whilst Mr Javid was keen to keep this spending in line with balancing the books, hence the struggle. It is suggested that the Sunak’s budget may contain the larger spending pledges that Cummings wants to see, but the challenge will be to ensure that there is sufficient time to prepare for 11 March. Some commentators are suggesting that Budget day may therefore be delayed to allow this to happen.
So what can we expect to see in this Budget in the area of taxation?
Much column space has been given to an overhaul of Entrepreneurs Relief (ER) which is available when shares in qualifying businesses are sold or assets used in a business where the qualifying person has retired, disposed of. Currently there is a two year window to qualify for this relief and a minimum percentage holding, but having done so the relief allows for the first £10m of gain to be taxed at 10%. It is also a lifetime limit so the opportunity exists for the relief to be used against multiple gains – so a serial entrepreneur has the opportunity to make 5 gains of £2m and pay tax on them all at 10%.
When the lifetime limit was raised to £10m, the thought was that it would bring entrepreneurs to the UK to trade and make capital gains in the medium to long term that could be taxed at 10%. Essentially this hasn’t worked and critics pointed to abuse of the system with income schemes being used to tax at 10% rather than 40% or 45% under income tax. The qualifying time period was extended to 24 month from a previous 12 to counter this, but it is still felt that the scheme provides too much help to the “super rich” rather than a seriously good pat on the back to the entrepreneur who has worked hard and done well before selling up and passing his business onto someone who can take it to the next level.
At this time there have been no leaks as to what might happen. Some commentators have suggested that ER will be withdrawn completely whilst others believe that it might fall back to its original level of £1m. Some suggest that it might take place from the evening of budget day but the smart money is on from 6 April following the announcement.
This leaves little time to take action – if in fact action needs to be taken. The £10m lifetime limit rarely gets used in full and so restricting it, whilst disappointing to some tax payers, will maybe not cause consternation amongst the masses. In fact, it might be an announcement that provokes wild celebration in new Tory seats in the North and South Wales which ultimately doesn’t mean that much to most taxpayers making a claim.
There are two main groups that might be effected:
- Those that are imminently looking to sell in order to retire
- Contractors who have built up a nest egg in their companies for retirement and may be going onto PAYE from 6 April due to the changes in IR35.
If the scheme were to be removed then both groups would be hit hard, but reducing it to £1m would allow the latter to continue and still take benefits and the sellers maybe paying a larger tax bill when the sale takes place.
There are some options available if you are in the selling group but urgent action would be needed and there are substantial sale proceeds needed to make the costs of the planning effective.
As this was an area of taxation mentioned in the Tory Manifesto for last December’s election – if it survives this Budget due to the change in Chancellor, it is unlikely to see out this Parliament in its current form.
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