Chancellor cuts Lifetime Allowance on Entrepreneurs Relief

Rishi Sunak announced today that the current annual £10m lifetime allowance for Entrepreneurs Relief, will be reduced to £1m. This will apply to qualifying disposals made on or after 11 March 2020 and to certain disposals made before 11 March 2020.

Sunak said: ‘We need more risk taking and creativity, so we are not going to fully abolish entrepreneurs’ relief, but we will reduce the lifetime limit from £10m to £1m’.

Under pre-Budget rules Capital Gains Tax (CGT) is paid at 10% on up to a lifetime limit of £10m worth of qualifying gains.

Entrepreneurs’ relief reduces the amount of capital gains tax CGT) paid on disposals of qualifying businesses, shares in a personal company and shares from an enterprise management incentive (EMI).

Entrepreneurs relief was introduced in the budget of 2008 when the Lifetime allowance was £1m. It was subsequently raised to £2m, £5m and then £10m by 2011 and had remained unchanged since then.
Business owners have used the relief, to build up a retirement pot represented by the gain made from eventually selling their company.
This change in legislation has indirectly further improved the financial attractiveness of a sale to an Employee Ownership Trust (EOT) where a ‘qualifying sale’ is subject to a 0% CGT rate.

The qualification criteria for an EOT include the following:

  • The owner must be selling shares in a trading company or the parent company of a trading group
  • The company must have sufficient employees who are not shareholders or connected persons (shareholders and connected persons must not represent more than 40% of the employees of the company)
  • The EOT must acquire a controlling interest in the company – more than 50%
  • The EOT must be established for the benefit of all employees

An EOT yields benefits for both business owners as well as employees (who can qualify for tax-free bonuses of up to £3600 annually) and there is empirical evidence showing that businesses once employee-owned, enjoy improved productivity and are more resilient.

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