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Tax planning: CGT and Entrepreneurs’ Relief

The coalition government’s Emergency Budget proved to be a mixture of tough spending cuts and tax increases, and its release in June triggered a certain amount of controversy.

As expected, Chancellor of the Exchequer George Osborne raised the rate of capital gains tax (CGT) for higher-rate taxpayers, although the increase was less harsh than some commentators had feared.CGT rose from 18% to 28% with immediate effect.

However, the Chancellor also decided to alleviate the pain of higher CGT by increasing Entrepreneurs’ Relief on business disposals. Entrepreneurs will pay CGT on their lifetime gains at a rate of only 10% on the first £5 million, increased from the previous level of only two million.

In his speech, the Chancellor said, “I am acutely aware of how important it is to protect the incentives to succeed in business and to innovate.” Individuals can claim Entrepreneurs’ Relief as many times as they like until the ceiling of £5 million has been reached. The coalition government is aiming to demonstrate its support for smaller companies, and the measures were broadly welcomed by many small businesses and entrepreneurs who greeted the news as tangible evidence of  this.

However, the announcement generated criticism from some business groups, who believe the measures are too limited. KPMG expressed disappointment that the Chancellor was not prepared to extend Entrepreneurs’ Relief to private-equity style investments and that many employees will not qualify for relief on shareholdings in their employing companies. In order to qualify for Entrepreneurs’ Relief, entrepreneurs must have held the relevant assets for at least a year, must be an officer or employee of the company, and must have an equity ownership stake of 5% or more in the business.

Those with a stake of less than 5% will not qualify for Entrepreneurs’ Relief and will have to pay the full CGT rate of 28% on any gains. This means that, for some small companies, only the major stakeholders will benefit, while individuals with relatively small shares in the business will lose out. Moreover, entrepreneurs who realise more than £5 million from the sale of their business will actually end up worse off under the new regime,  because their excess gains will be taxed at the new rate of 28%, rather than the old rate of 18%.

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