Managing Director of Sandaire Private Equity, Michael Mowlem, looks ahead at the upcoming UK Budget announcement, with a spotlight on Entrepreneurs’ relief.
The first Budget for the new UK Government set for 11 March looks like it will remain on that date, in spite of the disruption caused by the change of presenter. Among various proposals that may well have been deliberately leaked to the press, it has been widely reported that the Government has been reviewing the Entrepreneurs’ Relief system for Capital Gains Tax and could possibly go so far as to scrap it entirely or restrict its application to make it materially less valuable to long term owners of businesses.
Entrepreneurs’ Relief was introduced in 2008 following the abolition first of capital gains indexation, retirement relief and then their replacement, Business Asset Taper Relief by Gordon Brown. Entrepreneurs’ Relief capped the lifetime gain at £1m which could be taxed at the lowest rate of 10%. This was a materially reduced incentive compared with Taper Relief, although in subsequent years, this has increased and since 2011, the gain has been capped at £10m. Entrepreneurs’ Relief has become a valuable tool, which rewards business owners investing for the long term and it is reported that in 2015/16, more than 50,000 people claimed it.
The abolition of Taper Relief was announced in the Autumn Statement in October 2007 to take effect from April 2008. While not unexpected, the announcement gave business owners little time to prepare their businesses for sale. Following the Autumn Statement, in review of the decision, the Treasury Select Committee “recommend[ed] that the Government….. set out how it proposes to mitigate the effects of the withdrawal of taper relief, particularly for those already within the two-year qualifying period and with especial reference to small businesses”. The Chancellor announced just a few weeks later a consultation and in January 2008, Entrepreneurs’ Relief was launched. Although the period between October 2007 and April 2008 was depicted by uncertainty, business owners reacted quickly and used the six month notice period of the abolition of Taper Relief to accelerate plans to sell their businesses.
Preparing a business for sale is no overnight matter and preparations can take several months or longer, as companies that have been family owned for years reorganise themselves ahead of a disposal. Actions might include divesture of non-core assets, evolving the management team, developing strategy and launching new products in new markets, all to increase the attractiveness of the business to potential acquirers. Nevertheless business owners used that six-month period where they could, to accelerate sales processes.
Research by CMBOR showed 2007 to be a record year for UK private equity buyouts greater than £10m by volume. This no doubt provided a much-needed boost in corporate M&A activity in the year leading up to the defining moments of the Global Financial Crisis in October 2008 with the collapse of Lehman Brothers.
If the Government chooses to scrap Entrepreneurs’ Relief, or tinker materially, it is hoped they learn from the previous occasion and herald the change to enable business owners, their advisers and potential acquirers, sufficient time to plan ahead. This might offer a boost to M&A markets with the added benefit of delivering revenue to the taxman at the same time.