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Capital Gains Tax - Entrepreneurs' Relief

Posted on 20 April 2020

The UK Government's Budget announcement on 11 March 2020 was overshadowed by the COVID-19 crisis. Against the extraordinary backdrop, the government introduced its much predicted restriction of capital gains tax (CGT) Entrepreneurs' Relief (ER).

In summary, effective from 11 March 2020, the lifetime limit on gains eligible for ER (which reduces the rate of CGT payable on qualifying disposals to 10%) was reduced from £10 million to £1 million.

Despite speculation that ER would be abolished altogether, this change to the lifetime limit is a significant reduction, which arguably decreases the incentives for entrepreneurs to continue to grow their business once past the £1million threshold. However, the Government's rationale for the move was that 80% of small business owners would be unaffected by the change and ER has not sufficiently encouraged creative entrepreneurship.  

Furthermore, in order to frustrate pre-emptive tax structuring, the government have also implemented anti-forestalling measures to apply to:

  1. disposals made before the 11 March 2020 but that will complete on or after this date;
  2. disposals where an exchange of shares takes place between 6 April 2019 and 11 March 2020. 

The key concern will be for business owners who are over the £1million limit at the effective date or have implemented business planning based on the previous ER regime, and how they may be able to mitigate the consequences of the changes to ER. However, it should be noted, if the upper limit is utilised, the regime can still save up to £100,000, and if a spouse also qualifies for ER then both individuals can seek the relief.

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