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Capital Gains Tax, Entrepreneurs’ Relief and Transactional Activity

The emergency budget has come and gone. Despite all the uncertainty and rumours circulating beforehand regarding capital gains tax (CGT) we now know that the rate of CGT for higher and additional rate taxpayers has been increased from 18% to 28%. Further increases have not been ruled out, but the headline grabbing rate is 28%.

Interestingly there has been less media coverage to the increased entrepreneurs’ relief. The good news is that the rate of CGT on gains qualifying for entrepreneurs’ relief remains at 10%.  Even better news is that the lifetime limit for entrepreneurs’ relief has been increased from £2 million to £5 million.

The entrepreneurs’ relief rules are complex. However, if an individual makes a capital gain on which full entrepreneurs’ relief is available then that person would actually pay less tax under the new rules for qualifying capital gains of up to £7.41 million (assuming there were no previous gains eating into the lifetime limit).

The enhanced entrepreneurs’ relief seems to be a very clever move by the chancellor. Although the headline rate of 28% is still low compared to income tax rates, it should certainly go some way to preventing well-publicised stories of hedge fund managers paying less tax than their cleaners (as the fund managers would probably not qualify for entrepreneurs’ relief).

Further, a low CGT rate of only 10% on the first £5 million of lifetime qualifying gains hopefully won’t stifle entrepreneurism. These low effective tax rates should still encourage entrepreneurs to set up new businesses, which provide new jobs and may also provide technological or environmental advances.

As noted above, further increases to the top CGT rate of 28% have not been ruled out, and there could be a further increase in the 2011/12 tax year. There is no certainty that any increase would be accompanied by any more generosity to the entrepreneurs’ relief rules. Therefore it could well make sense to consider disposing of assets pregnant with large capital gains prior to 5 April 2011.

Now the summer is upon us, which is traditionally a very quiet period for Merger & Acquisition activity, it is unlikely that much will happen till the autumn. However, later this year or early next year there could well be an upsurge in the levels of acquisitions and disposals taking place. And remember, early planning is essential to a successful acquisition or disposal, so don’t leave it too long before getting in touch.

Daniel Shear

Partner, Corporate Finance

T +44 (0)20 8922 9321
E daniel.shear@bkl.co.uk

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