This morning the Institute for Fiscal Studies (IFS) called on the Chancellor to abolish Entrepreneurs’ Relief, an incentive which entitles small business owners to a reduced rate of capital gains tax on the proceeds of selling their firms.
A lot of business owners struggle to access pension products, so this relief is often key to funding their retirements after they’ve sold their firms or transferred them to an employee ownership model.
The think tank states that the Entrepreneurs’ Relief title is ‘misleading’, arguing that three-quarters of the cost of the relief benefits 5,000 individuals with an average tax saving of £350,000.
However, figures highlighted by the Federation of Small Businesses (FSB) today show that, of the around 43,000 business owners who claim Entrepreneurs’ Relief each year, 38,000 do so on gains of less than £1 million, with an average saving of just over £15,000.
If reform goes ahead, as outlined in the Conservative Manifesto, FSB suggests reducing capital gains tax to zero on the first £1 million of a business sale to protect this substantial majority of business owners, and bring the relief in-line with the pensions lifetime allowance, as well as the treatment of primary residential homes.
FSB National Chairman Mike Cherry said: “Scrapping Entrepreneurs’ Relief would destroy the retirements of thousands of business owners over the coming years.
“The vast majority of those who claim Entrepreneurs’ Relief do so on sums of less than £1 million, with an average saving of around £15,000. For many entrepreneurs approaching retirement today, their business is their pension. The few thousand they stand to save through this relief pails into insignificance when compared with the sums that many employees will gain through reliefs, the state pension and employer pension contributions.
“There’s nothing misleading about the term ‘Entrepreneurs’ Relief’ – it’s the IFS’ statements that are misleading. It saves tens of thousands of businesses each year from having their businesses plundered by the taxman at the point of sale – businesses that have paid taxes year after year.
“Removing Entrepreneurs’ Relief would disincentivise employee ownership – a model we know is proven to increase motivation and productivity levels – by taking a chunk out of the value of businesses as they’re handed over. We’re trying to encourage more business owners to think about responsible exit strategies. Upping capital gains tax at the point when they sell or hand on their firms will not help that.
“Fundamentally, we’re trying to make the UK a more, not less, attractive place to start an enterprise. Removing Entrepreneurs’ Relief is not sending the message that Britain is open for business – quite the opposite. Reforming the relief to target it at just the first £1 million of a business sale while scaling it back at the top end could mark a way forward.”
As the UK’s largest business support group, FSB is the voice of the UK’s small businesses and the self-employed. Established over 40 years ago to help its members succeed in business, FSB is a non-profit making and non-party political organisation that’s led by its members, for its members. As the UK’s leading business campaigner, FSB is focused on delivering change which supports smaller businesses to grow and succeed.
FSB offers members a wide range of vital business services, including access to finance, business banking, legal advice and support along with a powerful voice in Government. Each year FSB also runs the UK’s Celebrating Small Business Awards. More information is available at www.fsb.org.uk. You can follow us on twitter @fsb_policy and on Instagram @fsb_uk.