With amendments to Entrepreneurs’ Relief introduced in 2020 and rising media speculation over potential changes to Capital Gains Tax (CGT), this article investigates the impact on mergers and acquisitions.
Under previous legislation, Entrepreneurs’ Relief provided a generous reduction in tax liabilities, reducing CGT rates from 20% to 10% on the first £10 million of gains realised through the disposal of qualifying business assets.
However, on the 11th March 2020, tax-saving opportunities diminished significantly when the Entrepreneurs’ Relief lifetime limit was reduced from £10 million to just £1 million.
It must be remembered that, even at the higher rate of 20%, CGT remains substantially less than personal tax. Business asset disposals that qualify for Entrepreneurs’ Relief also attract less tax than a direct sale of business assets, which could attract 19% corporation tax as well as an additional 38.1% dividend tax.
Entrepreneurs’ Relief is available to individuals rather than companies. Therefore, where a disposal of business assets qualifies, each individual shareholder will only be taxed the lower Capital Gains Tax rate on the first £1 million, rather than it being applied to the company as a whole.
Announcing Entrepreneurs’ Relief amendments in his 2020 Budget, Chancellor Rishi Sunak indicated that 80% of small businesses would be unaffected by the changes. Sunak explained that although he wanted to encourage risk-taking entrepreneurs, he had also heeded representations that the tax break should be abolished completely, hence the reduction.
Even with the rate of CGT limited to just 10% on the first £1 million of gains, Entrepreneurs’ Relief still offers significant tax saving potential, particularly in terms of mergers and acquisitions.
As part of the legislative changes, Entrepreneurs’ Relief was renamed Business Asset Disposal Relief in the 2020/2021 tax year. Individuals must meet certain eligibility requirements, satisfying defined criteria throughout the ‘qualifying period’ – a two-year timeframe ending at the date of asset disposal.
Throughout the qualifying period, the stakeholder must:
- Have been a company employee, officer, or sole trader
- Have held a stake of 5% or greater of the company’s share capital, as well as 5% of voting share capital
- Have remained within their individual £1 million lifetime disposal limit
Eligibility also depends on whether an individual is disposing of shares within a business or disposing of the entire business itself. Although both instances can qualify for relief, there are notable differences in eligibility criteria.
In the case of a disposal of shares, the company must be a trading company, or a holding company of a trading group, trading throughout the two-years preceding share disposal.
Proposed Changes to CGT
With the UK economy reeling from the continuing COVID-19 crisis combined with Brexit uncertainty, analysts indicate that Rishi Sunak could turn to CGT to help meet the potential £391 billion deficit created by the coronavirus pandemic.
As Alistair Darling pointed out in a recent radio interview, the only popular tax is one that everyone thinks is being paid by someone else. In 2018/19, just 276,000 individuals paid CGT, but from that low number, the UK Government generated an impressive £9.5 billion in revenue. As a global mergers and acquisitions specialist, Benchmark International always recommends that clients seek professional advice from qualified tax experts. Nevertheless, in terms of benefiting from the tax-saving potential of Business Asset Disposal Relief, it may be a prudent to act sooner rather than later, to avoid missing out on tax relief.