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Author: Sacha Bright, CEO
Entrepreneurs' Relief is getting cut to £1M from £10M. If you sell your business and use this once-in-a-lifetime allowance, you will pay full Capital Gains tax over £1M. The tax has been previously discounted to a rate of 10% from 20% and has encouraged enterprise in the UK.
WHY? I accept that £10M is considered to be very wealthy nowadays. However let’s consider that an entrepreneur has paid tax in NI contributions on top of his employees, VAT, business rates and been the source of employment for many years, generating income tax revenues for the Government. 90% of an entrepreneurs wealth is tied up in their business. Sometimes remortgaging their house to pay wages with no guarantee of a return and they have no enhanced tax relief on their investment, like high-net-worth, EIS and SEIS investors.
In my opinion, this tax was motivated out of the need to fund this budget. It’s a false economy. Entrepreneurs take the biggest risks and create wealth and jobs, which in turn generates tax revenues. They need to be incentivised to continue to take these risks.
The Chancellor Rishi Sunak described the tax relief as ‘expensive, ineffective and unfair, with three-quarters of the relief going to just 5,000 people’.
He added that he ‘did not want to discourage genuine entrepreneurs’, and therefore reduced the allowance rather than removing it completely.
I would argue the opposite: the previous once-in-a-lifetime tax allowance encouraged enterprise, created thousands of jobs including re-investment into new businesses.
In 2019 the relief, being levied at 10% of the capital gain was £2.7bn. Thus £27bn of successful companies were created, which is equivalent to at least 5 FTSE 100 companies per annum.
The new reduced allowance is an unfair tax and is targeting genuine lifetime business owners who overnight have doubled their tax liability. “This is our pension you are robbing Mr Chancellor and I would argue that £1M tax relief on a business you spent your life building is not enough”. Especially when some government employee pension pots exceed £3M. £1M capital allowance does not encourage entrepreneurs to take risks in the UK and the allowance should be inline with the most successful government & private pension pots.
Entrepreneurs are sharp cookies and at the end of the day, they will just leave the country instead of paying the tax. This move will not encourage re-investment via EIS and SEIS schemes, which creates more jobs and taxable income. Entrepreneurs won't sell their business until tax policy changes. This tax change does the complete opposite of what it was designed to do and I am shocked that a conservative Chancellor would impose it.
Tagged: Tax Entrepreneur News
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