With the Budget looming, there has been a lot of speculation about what it is likely to address.
One of the many things people are expecting to see talked about is Entrepreneurs’ Relief, a scheme available to Directors who own 5% or more of a company when it is sold having held the shares for a minimum of 12 months.
Vincent Simmons, Director, Bennett Verby elaborates: “There have been many articles forecasting doom for the relief, predicting that the Spring Budget could spell the end of it altogether. But this is a very pessimistic view, and one that shouldn’t be taken too seriously.
“In its current form, Entrepreneurs’ Relief allows these company owners to enjoy a 10% tax rate on capital gains (the profit from the sale of the company), rather than the likely 28% payable without the relief.
“Of course, there is a lifetime limit on this relief of £10 million. Once the Director has made £10 million worth of qualifying gains, they will no longer qualify for the Entrepreneurs’ Relief scheme.
“The long and short of it is that, if you want to close-down a solvent company in which you are more than a 5% stake-holder, Entrepreneurs’ Relief would allow you to pay as little as 10% tax on the distributions you receive from your appointed liquidator, as long as these distributions do not exceed £10 million.”
According to Vincent, the problem is that the government is concerned that the current capital distribution regime is open to exploitation as a tax avoidance measure. It seems that too many people are simply closing their existing businesses and commencing an identical business shortly afterwards.
Speculative articles suggest that the government will use their Spring Budget to announce the end of the line for Entrepreneurs’ Relief. Some surmise that the Chancellor will tax distributions from the solvent closure of a company as dividends. This would mean business owners would have to pay a significantly higher tax rate on any profits they make on the solvent liquidation of their company.
Vincent feels this would be bad news indeed: “If a significant proportion of your investment were to be relinquished to the government in tax. For this reason, it’s likely that, should these measures be introduced, we will see a massive reduction in the number of solvent liquidations taking place.”
As ever, any predictions about the Chancellor’s Budget are just an educated guess. To keep up with insights and commentary on the Budget as it happens, follow #BVBudget on Twitter 16th March.
Vincent Simmons FIPA, FABRP is Director of Bennett Verby’s Corporate Restructuring & Insolvency Department.