Entrepreneur’s Relief could supercharge expanding businesses

The government can help create a tax environment that enables small and medium sized businesses to make long-term investments, and the CBI responded to a consultation welcoming the importance that HM Treasury have placed on reassessing the current qualifying rules for Entrepreneurs’ Relief (ER). Members of the CBI’s Enterprise Forum – comprising of 50 leading SMEs from across the UK – have long praised this relief and have highlighted the much-needed support it provides entrepreneurs on their long-term growth journey.

What is Entrepreneur’s Relief?

ER was introduced in 2008 to incentivise and reward entrepreneurs who, with significant initiative and risk, play a key role in building and growing a business. ER provides a 10% Capital Gains Tax rate for gains on qualifying business assets, compared with the main higher rate of 20%. This means that entrepreneurs can keep more of the rewards when their business is successful.

The government’s proposed reforms do not go as far as directly lowering the 5% threshold, the proposed process, whereby entrepreneurs may remain entitled to ER on gains in shares in a company that relate to the time before an individual’s shareholding became diluted, is positive news for entrepreneurs.

What does this matter?

A business founder may lose eligibility for ER when their company’s fundraising efforts result in their own shareholding becoming diluted below 5%. Therefore, for many CBI members, the existing ER threshold of 5% introduces a personal dilemma for its founders that acts as a potential barrier to growth.

In cases where an individual does not want or is not able to make further investment, they may choose to instead leave the company, or decline to seek funding which could help the business grow. Such an outcome conflicts with the intended purpose of ER, and the CBI welcomes the government’s view that it is right to act now to remove this barrier.

What’s next?

The government responded at Autumn Budget 2018 that they would proceed with the overhaul of ER. The CBI remains in an active dialogue with HM Treasury on the issue.

CBI members continue to recognise HM Treasury’s efforts to strike a balance between removing this potential barrier to the long-term growth of firms and finding a solution that remains targeted, proportionate and value for money.