Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief). What Next?
We anticipate further changes, rather than it being scrapped entirely
Back in March, Chancellor Rishi Sunak delivered his budget for 2020 and announced that the tax break for entrepreneurs would not be scrapped despite many calls for this to happen. Indeed, many commentators were predicting it would be scrapped. What he did do was reduce the lifetime limit by 90% from £10 million to £1 million and renamed it as the Business Asset Disposal Relief. Our article at that time commented on how this would affect people going forward and suggested that such a big reduction was likely to be a foreshadowing of the relief’s total demise, and what that could mean to directors who want to extract the value from their companies through the use of Members Voluntary Liquidations. This article can be found here.
While the next budget is expected to take place in November 2020, the Chancellor has requested a production of official economic forecasts for mid to late November. This means that the Chancellor is able to delay the budget until Spring, as happened in 2020, as the budget cannot be announced before this data is available. However, whether the budget is announced in November or Spring, we feel now it is a good time to review Business Asset Disposal Relief and consider what may happen to it. Our view is that further changes will be introduced, but that it is unlikely to be scrapped altogether.
A Recap on Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief) and the March 2020 budget
In essence, Business Asset Disposal Relief is a way to maximise financial gains by allowing individuals to apply a reduced rate of 10% in respect of capital gains tax on the profits made when selling qualifying assets, including the business itself. Standard rates of CGT can be as high as 28%, depending on income and type of capital gain, so Business Asset Disposal Relief offers a significant saving. The recent reduction in the lifetime limit has meant people who have used this relief before may not be able to use it going forward if they have already passed the threshold. However, the lifetime limit does not affect new entrepreneurs, who can still apply for it, creating an incentive for them to host their businesses in the UK.
It is worth noting that this reduction in the lifetime limit could be good news for accountants. This is because they will have to discuss with those of their clients who can no longer apply for the relief different ways of extracting value from their businesses prior to sale so that they are within the lifetime limit. One such method potentially being increased pension contributions.
Following our previous article, which alerted many clients to the possible changes in the March 2020 budget, we have helped a number of companies wind up solvently, using Members Voluntary Liquidations, taking full advantage of the existing (at the time) Entrepreneurs’ Relief rules before the lifetime limit (and the name change to Business Asset Disposal Relief) came into effect. Click here to see some of our testimonials.
What might happen in the next Budget?
Going forward, with the next budget expected soon, we asked ourselves the question: “what changes are likely, based on the current information available?”
Reviewing the previous changes and the feelings of the Government towards Business Asset Disposal Relief, it seems likely that we can anticipate some further changes in the next budget. However, it appears unlikely that the tax benefit will be scrapped with no alternative in place, especially given the current difficult business climate caused by Covid-19. This is because tax breaks are the Government’s preferred way of attracting and keeping talented business people – in other words, entrepreneurs. In short, the Government’s aim is to assist entrepreneurs and provide incentives for them to base their businesses in the UK.
A main criticism of Business Asset Disposal Relief is that many of the people who apply for it do not represent the Government’s view of what a ‘true’ entrepreneur is. The prevailing attitude is that many people applying for Business Asset Disposal Relief are wealthy individuals simply looking for a way to reduce their tax bill. We can hypothesise, therefore, that it is likely that any changes to Business Asset Disposal Relief in the next budget might well feature attempts to reform the system to protect/help what they consider to be ‘true’ entrepreneurs and stop individuals using it as a tax saving loophole.
It is difficult to see any return to what might be termed ‘the good old days’. Indeed, the next few years will bring on-going changes to Business Asset Disposal Relief. For that reason, it is important to keep in mind how these changes may affect you or your client’s position if the plan is to sell business assets or use an MVL to liquidate the business in the near future and over the next few years.
Talk to us about Solvent Liquidations and how to take advantage of the remaining benefits offered by Business Asset Disposal Relief
With the reduction in the Business Asset Disposal Relief’s lifetime limit and the likelihood that it will not survive another budget in its current form, it may be worthwhile for you or any of your clients looking at claiming Business Asset Disposal Relief to contact us to discuss options and how best to proceed, before the next budget.
For more information regarding the Members Voluntary Liquidation procedure, we have a very handy guide which outlines the process and key parts and can be found here.