Delivering his Budget this afternoon, Rishi Sunak said there had been calls to scrap the tax completely which had been criticised as the “the UK’s worst tax break”. But instead of abolishing the tax altogether, the chancellor has slashed the lifetime limit from £10m to £1m.
Entrepreneurs’ Relief allows those who have owned a business for two years or more to benefit from a reduced rate of Capital Gains Tax when they sell the business. Instead of paying 20 per cent tax they pay 10 per cent.
At a cost of over £2bn a year, Sunak said the relief was expensive and unfair, with nearly three quarters of the cost the relief going to 5,000 individuals. Less than one in ten claimants said the relief had been an incentive to set up a business.
Owners of furnished holiday let businesses are eligible to claim the relief when they sell a property, while landlords of buy-to-let properties are not.
Rachael Griffin, tax and financial planning expert at Quilter, said: “Rumours swirled for months prior to the Budget that Entrepreneurs’ Relief was in line for significant reform or even abolition and they proved to be correct. While the relief has not been scrapped altogether it has been significantly cut.”
More than 80 per cent of business owners using the relief are forecast to be unaffected by the reduction in the lifetime limit.
Sunak said he had ignored calls to get rid of the relief all together so as not to discourage genuine entrepreneurs who rely on the relief.
The reforms are expected to save the Treasury £6bn over the next five years. The money is to be ploughed back into more support for businesses.
Griffin added: “By the Government’s own admission it has chosen to reform this relief following evidence that the rule has done little to incentivise entrepreneurial activity and in fact mainly benefitted a small number of very affluent taxpayers.
“However, Sunak chose not to go the whole hog and scrap the relief altogether in a bid to continue to encourage genuine entrepreneurs who do rely on it. It is improbable that these changes are going to have any material impact on entrepreneurialism in the UK and may give the Treasury more money to play with going forward.”