The lifetime limit on Entrepreneurs’ Tax Relief was raised from £1 million to £2 million in the UK’s 2010 budget.
This relief enables many entrepreneurs to pay just 10% capital gains tax when they sell the assets they create, rather than the standard flat CGT rate of 18%.
The £2 million allowance is spread over your whole lifetime.
For example, if you sell two businesses in your life for £2 million, you’ll only pay 10% on the capital gains.
Sell a third business and you’ll exceed the Entrepreneurs’ Tax Relief lifetime limit of £2 million. You’ll therefore pay 18% CGT on the gains above the limit.
The Entrepreneurs’ Tax Relief can be applied to:
- Capital gains made on the disposal of all or part of a business.
- Capital gains made on disposals of assets following the cessation of a business.
- Capital gains made by individuals involved in running a business.
Note that the lifetime limit also applies to a company’s shares, providing you own at least 5% of the company (and have voting rights), and that you’re an officer or an employee.
The origins of Entrepreneurs’ Tax Relief
Why does this special perk for entrepreneurs exist, you may ask? After all, the flat 18% CGT rate isn’t particularly high compared to other countries.
The reason is that you could previously sell business assets at a lower rate, and you could also claim taper reliefs to reduce capital gains tax. That old regime aimed to take into account inflation and reward long-term ownership.
When the Government brought in the flat 18% tax rate in 2008, this all went out the window. As a result, small businessmen – think local traders or professionals such as dentists and vets – suddenly faced an effective 80% rise in the CGT they’d pay when they sold up at the end of their careers.
It’s these traditional and established small enterprises who lobbied for this tax break, and who benefit most from it. It’s not particularly designed to encourage the next Richard Branson.
For more official details on the Entrepreneurs’ Tax Relief, check out the official HMRC page.
And it’s a crazy idea that sounds good in headlines. The structure of incentives is all wrong – the constant push for the ‘out’ rather than building something of value for the long term.
Everything should be taxed as income, based upon profits over the term of the business. Small company tax should be higher than large company tax and the same as personal tax. The differential between self-employed and employed should be eliminated. And in return you cut the ’employment taxes’ and allow investment to be fully tax relievable.
Unsurprisingly that would then encourage employment and investment to grow into a large company. Which is kind of what we want rather than the flipping mentality we have at present.
Neil, thanks for your comment, but I have to say I don’t really agree with you for several reasons.
To pick the main one, people who are good at starting small companies (or who have a great idea once in their life and aren’t even good at starting small companies but are fortunate to have success with it anyway) are very often poor or uninterested in managing large companies. Starting a small company is risky, and income earned is usually minimal in the early on (if there’s any income at all). It seems harsh to me then to tax the entrepreneur at the same rate as workers who take none of these risks or salary reductions when he comes to exit the business.
It also seems counterproductive to try to support large companies over small. A nation with a thriving start-up culture is ever better-placed in the modern work — think Silicon Valley versus Japan’s monolithic corporatism.
‘Flipping’ to use your term has negative connotations but selling up can be a vital stage in a business going to the next level (because it lacks the funds or infrastructure to scale), or the business owner going to the next stage in his life (e.g. Your local corner shop owner who has spent 20 years building up a reputation and reliable customer base working 7 til 9pm, but at 65 wants to cash out and retire).
Not all of that applies to say private equity bosses (or investors) trading assets, of course (though the risk element does). Equally, the entrepreneurs relief is clearly just a cobbled approach to solve the problems raised above for most small traders, without doing anything for someone who builds a really lucrative business.
I don’t claim it’s elegant, and it wouldn’t have been my solution. But better than nothing I feel.