The controversial Entrepreneurs’ Relief on selling a business has been partially abolished in the Budget.
Chancellor Rishi Sunak said the tax relief – which some commentators claimed was being used to make the wealthy even wealthier – was costing nearly £3bn a year in lost revenue.
Now he has slashed the allowance by 90%, reducing the lifetime limit on capital gains tax relief from £10m to £1m.
Sunak called the relief “ineffective” and “unfair”, with three-quarters of the relief going to just 5,000 people.
He said Entrepreneurs’ Relief had primarily benefited a small number of very affluent taxpayers and done little to generate additional entrepreneurial activity.
However he said he did not want to “discourage genuine entrepreneurs”, and said eight out of ten business owners would be unaffected by the changes.
Entrepreneurs’ Relief was introduced by former Labour Chancellor Alistair Darling in 2008. It allows business owners to pay a lower rate of capital gains tax of just 10% when they sell their company – the normal rate is 20% for a higher rate taxpayer. The initial cap on relief was set at £1m but has since risen to £10m.
Responding to today’s Budget statement, the National Chairman of the Federation of Small Businesses (FSB), Mike Cherry,said: “This is a pro-small business Budget which has delivered a high streets bonus, a series of Conservative manifesto promises to small businesses, and emergency steps to support small firms through the coronavirus outbreak.
“The sensible compromise on Entrepreneurs’ Relief is one that we have proposed and championed, and everyday entrepreneurs will be pleased to hear the Chancellor say that he has listened to FSB on this.”
David Bywater, KPMG Private Enterprise Tax Partner, added: “Investors and businesses owners will be somewhat relieved that today’s announcement did not go as far as many had suggested in completely abolishing Entrepreneurs’ Relief.
“This incentive has been under the microscope for a while following concerns that it is costing far more than was originally anticipated and didn’t entirely deliver on its objective to act as an catalyst for investment in and growth of entrepreneurial businesses.
“Entrepreneurs’ Relief is one of several incentives for startup and fast growth businesses, and this announcement should help businesses to plan their long-term investment strategies whilst reassuring investors and innovators that the UK remains open and supportive of new businesses.”