Entrepreneurs’ Relief at risk in the Autumn Statement?

There is widespread speculation about the possibility of the Chancellor making further changes (restrictions) to entrepreneurs’ relief (ER) when he makes his Autumn Statement next Wednesday, 25 November.

His previous reforms have not all gone down well because they hit not only their intended targets of those abusing the relief by selling goodwill to their own companies, or artificially engineering associated disposals to obtain ER when selling assets owned personally but also normal commercial transactions including successions within families and sales to vehicles substantially controlled by independent third parties. We understand that the Treasury may be looking at removing these anomalies by creating a form of targeted anti-abuse rule (TAAR) that would enable transactions not wholly or mainly made for tax-abuse purposes still to qualify for ER.

There is always the possibility that CGT rates as well as specific reliefs could come under the spotlight next week. The current top rate of CGT, 28% is roughly equivalent to the effective rate that a higher rate income tax payer currently pays on dividends but the higher rate of income tax on dividends is due to go up on 6 April 2016 to 32.5% (except for the nil-rate on the first £5,000 of dividends), so who is to say that CGT could not creep up to a similar level? And if the main rate goes up the ER rate could easily follow suit.

If the Chancellor does have it in mind to increase CGT rates in 2016/17 he is unlikely to show his hand this early unless he wants to provoke a rush of pre-emptive ER-banking arrangements that will provide him with a cash-flow benefit. So we may hear nothing before the March Budget; in fact governments have previous here as something similar happened when taper relief was abolished and ER subsequently introduced, as well as, more recently, the additional rate of income tax.

Making commercial decisions around possible tax changes is never easy; crystallising a tax liability that might not otherwise accrue and accelerating the point at which tax is paid should not be undertaken lightly. However, completing a transaction just before a change as opposed to just after will generate known tax costs, and potentially a tax saving.

If the intention is to raise more CGT by restricting ER a prime target might be to remove ER from any disposals to connected persons: already gifts cannot be combined with ER; it’s a case of either one or the other, so restricting ER to cases when a business finally left the family completely, or virtually completely.

ER targets trades but furnished holiday lettings (FHLs) also benefit because they are deemed to be trades for CGT purposes. It has already proved difficult to claim FHLs amount to businesses for IHT purposes and it would not require great legislative drafting skill to strike out that deeming provision and subject FHLs to the full CGT rates.

The other CGT relief that benefits property business is the incorporation relief (TCGA 1992 s 162) that allows property portfolios to be transferred to companies CGT-free. Once nestled in the security of a company let property would enjoy the twin benefits of indexation relief and the lower corporation tax rates.

There are still more reasons to wait and see than to take precipitate action unless a sale is immediately in prospect but business owners will understandably be nervous and want advice, while advisers need to be prepared to weigh up the possibilities as objectively as possible in the absence of any really clear indications of what the Chancellor has in mind.

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