The headline change is that the individual lifetime allowance for Entrepreneurs’ Relief (‘ER’) has been reduced, with immediate effect on Budget Day, 11 March, from £10million to £1million.
The fear was that ER would be completely abolished following the government’s manifesto commitment to review and reform but the Chancellor accepted the view of the Federation of Small Business (‘FSB’) that the “Scrapping ER would destroy the retirements of thousands of business owners over the coming years.”
For owners of small businesses making future claims on gains of less than £1m, the reduction in the lifetime allowance will have no impact. However, for individuals making future claims on gains of £10m or more, the reduction in the lifetime allowance represents a tax cost of £900,000.
If previous claims have already been made in excess of the £1m lifetime allowance, then these will not be disturbed, but obviously no further claims can be made by that individual.
Anti-forestalling provisions
To complement the headline change to ER, the Budget also announced some measures to counter steps that taxpayers may have taken prior to Budget Day to “lock in” or “bank” ER in advance of any changes being announced.
Where contracts were entered into prior to Budget Day, but will only complete on or after Budget Day, then the reduced lifetime limit of £1m will apply unless:
• the parties to the contract demonstrate that they did not enter into the contract to obtain a tax advantage by reason of the timing rule in s28 TCGA 1992, and
• where the parties are connected, that the contract was entered into for wholly commercial reasons
Where the taxpayer believes that these tests are met, they have to make an additional claim as well as the normal claim to ER.
In addition, where shares have been exchanged for those in another company between 6 April 2019 and 10 March 2020 and both companies are owned or controlled by substantially the same persons, or shareholders have a greater percentage shareholding in the acquiring company and continue to meet the qualifying criteria for ER, then the following applies.
If an election is made under section 169Q on or after 11 March 2020, then the share disposal is treated as taking place at the time of the election and not at the time of the share-for-share exchange, meaning that the reduced lifetime limit of £1m will apply.
These anti-forestalling provisions will be of widespread application and the onus will be on taxpayers to demonstrate that the timing of transactions was for commercial reasons and not to “lock in” or “bank” ER.