Entrepreneurs often see their business as the retirement plan, the FSB said.

Plans have been drawn up by the Treasury to hit businesses with a £2.7bn tax rise in this month’s budget. Chancellor Rishi Sunak is set to scrap entrepreneurs’ relief, which gives a capital gains tax cut to people who start their own businesses.

Entrepreneurs’ relief was brought in by Gordon Brown’s Labour government in 2008 with the intention of encouraging people to start businesses. The scheme cuts the amount of capital gains tax paid, when they sell the business, from the usual 20% to 10% on up to £10m of lifetime gains.

The Chancellor will scrap the scheme in the 11 March budget as it disproportionately helps already wealthy businessmen in the South of England, the Sunday Times reports. But Hayden Bailey, partner at Boodle Hatfield, said: “Entrepreneurs’ relief does not just benefit billionaires as some commentators have recently suggested. The relief is a vital incentive for small business owners to continue to grow their businesses with a view to an exit.”

In 2018-19, the scheme cost the government £2.7bn in tax revenues, up from £427m in 2009-09. The extra revenue will be used to fund NHS, police and transport infrastructure spending, particularly in the Midlands and the North.

The Federation of Small Businesses (FSB) has released a statement saying that scrapping entrepreneurs’ relief will destroy retirements. “Scrapping entrepreneurs’ relief would make a mockery of the idea that it’s ever sensible to build up a business rather than investing in property, land or securing a gold-plated pension,” FSB National Chairman Mike Cherry said.

New FSB research on the costs of entrepreneurs’ relief shows that the annual cost of the incentive to the Treasury could be reduced by three quarters if it was concentrated on business sales of under £1 million. Of the 43,000 individuals that made use of the incentive in the financial year 2017-18, 38,000 claimed relief on business sales of under £1 million, coming at a cost of only £600 million to the Treasury.

“Scrapping entrepreneurs’ relief would destroy the retirements of thousands of business owners,” Mike Cherry said. “A lot of entrepreneurs see their business as their retirement plan. They don’t have the gold plated pensions enjoyed by Treasury civil servants.”

“Fundamentally we want to make the UK a more, not less, attractive place to start-up a business,” he added. “If this incentive goes, we risk losing entrepreneurs to other climes.” As an example, he mentioned Ireland where those over the age of 55 do not have to pay capital gains tax on disposals of businesses or farms up to the value of 750,000 euros.

The tax scheme has its critics as well. The Institute for Fiscal Studies (IFS) called entrepreneurs’ relief “misleadingly named”. “In 2017–18 three-quarters of the £2.3 billion cost of entrepreneurs’ relief benefited just 5,000 individuals, with an average tax saving among that group of £350,000,” the IFS said.

Abolishing entrepreneurs’ relief in capital gains tax and increasing council tax bills faced by those in more expensive properties could form parts of a desirable package of reforms to make the tax system both more equitable and more efficient, according to the IFS.

Image: fizkes / Adobe Stock

Related Articles