In advance of today’s hotly anticipated Autumn Statement, rumours abound that the Chancellor may be considering further reforms to capital gains tax. In particular, Entrepreneurs Relief, under which people selling businesses can avail of a greatly reduced tax rate (10% compared to 28%) on the first £10m of gains, is thought to be in the firing line.
When it was introduced, HMRC forecast that the relief would cost the Exchequer approximately £2bn per year; however, by 2013-14, the cost had soared to £2.9bn. Given that the beneficiaries of entrepreneurs relief are generally already financially well-off, being seen to either curtail the relief or increase the tax rate (perhaps from 10% to 15%), could be seen as a quick political win for the Chancellor. That said, while the short-term impact may assist the Chancellor in his mission to achieve a budget surplus by the end of this parliament, the long-term impact could be seriously detrimental.
Entrepreneurs are the lifeblood of a successful economy; they take risks with their own capital and create wealth and employment for others as a result. Increasing the tax burden on them, at a time when we need to encourage and nurture the private sector recovery, would be deeply counter-productive.
If the rumours prove to be correct, we could see a rush of M&A activity as business owners accelerate exit plans, rather than find themselves landed with a hefty tax bill. We would urge anyone considering a potential exit over the next year or two to consider engaging with professional advisors sooner rather than later, in order to ensure they are properly-prepared for a transaction.