PROPOSED ENTREPRENEURS RELIEF REFORMS ARE LEADING TO SURGE IN MEMBERS VOLUNTARY LIQUIDATIONS- CAN YOU AFFORD TO WAIT?

Entrepreneurs’ Relief (ER) is said to be under threat in the upcoming March Budget, with experts stating that it could be limited or even abolished. The news comes on the back of the Conservatives’ manifesto pledge to ‘review and reform’ ER, stating that the scheme hasn’t ‘fully delivered on [its] objectives’.

The proposed reforms are likely to be of concern to those contemplating the right time to exit their business. The announcement is particularly timely, given the implementation of IR35 into the private sector in April, which will have a significant impact on contractors operating through a limited company.

Those hoping for business as usual may find their optimism to be misplaced. The FT reported today that an unnamed senior cabinet minister believes that ER is ‘overly generous to the wealthy’. Furthermore, Boris Johnson recently told a group of female entrepreneurs in his constituency that ER was making some already rich people ‘even more staggeringly rich’.

What is Entrepreneurs' Relief?

ER is a UK tax scheme designed to incentivise people to grow a business. It was introduced by Gordon Brown in 2008 with the aim of turning the UK into the ‘European centre for entrepreneurship’.

In short, it works by reducing Capital Gains Tax (CGT) to a flat rate of 10%, rather than the higher rate 20%, on the first £10m of gains from selling a company. Additional criteria must also be met, for example:

• The business must have been trading in the 24 months leading up to the date when the shares were sold;

• The person disposing of the shares has to be an officer or employee of the company in question;

• The person disposing of the shares has to own at least 5% of the ordinary share capital of the business.

Exit via a Members Voluntary Liquidation

The closing down of a company by way of Members Voluntary Liquidation (MVL) allows a shareholder to extract the assets as capital rather than income. Distributions will therefore be subject to Capital Gains Tax, rather than the higher income tax. In many instances, ER will be available, serving to reduce the liability to the taxman significantly. This makes a Members Voluntary Liquidation the vehicle of choice for those seeking to exit their businesses.

What changes could happen?

The Institute for Fiscal Studies has suggested that ER may be costing the Exchequer £2.4bn a year.

At the time of writing, it appears that all options are on the table. The FT today quoted a senior government figure as saying that ministers were more likely to ‘recalibrate the tax break than remove it altogether’.

However, nothing has been ruled out and possible changes could include:

1. An increase in the current 10% tax rate;

2. Reducing the £10m lifetime limit or period of time in which assets need to be held to qualify;

3. Scrapping the scheme in its entirety.

A change of even 3 or 5 per cent could impact significantly on tax paid by entrepreneurs, and it is therefore prudent to consider whether you can risk waiting until March before taking action. 

Contractors operating within a limited company are already facing the prospect of the extension of IR35 reform into the private sector in April. For some time, contractors have been considering whether to liquidate their solvent business and move on to the payroll of an umbrella company. Other contractors are under pressure to join the payroll of their former clients, with many banks and organisations refusing to work with limited company contractors.

Act now

If you have been thinking about closing your limited company ahead of the IR35 Private Sector reform, or have plans to sell a business that you have built up, today’s newspaper reports should be a call for action.

For those with reserves of over £25,000, there may only be a small window of time in which to achieve the disposal and make use of ER.  

Contact Steven Mason at Inquesta via steven.mason@inquesta.co.uk or 07968 815271 for expert advice.