As expected, the Chancellor of the Exchequer raised the rate of capital gains tax (CGT) in the Emergency Budget in June. CGT rose from 18% to 28% for higher rate taxpayers only, with immediate effect. However, the Chancellor also decided to alleviate the pain of higher CGT for small business owners by increasing Entrepreneurs’ Relief on business disposals. They now qualify for a reduced CGT rate of 10% on the first £5 million of lifetime gains made through the set up and disposal of small businesses, claiming Entrepreneurs’ Relief as many times as they like until this limit has been reached.
The coalition government used this as a way to demonstrate its support for smaller companies, and the new measures were broadly welcomed by their owners. However, some business groups were critical, believing the measures to be too limited; for example they did not extend to private-equity style investments, and general employees will not qualify for relief on any shareholdings they build in the companies they work for.
In order to qualify, entrepreneurs must have held the relevant assets for at least a year, must be an officer or employee of the company, and must have an equity ownership stake of 5% or more in the business. This means that, for some small companies, only the major stakeholders will benefit, and highly successful entrepreneurs who realise more than £5 million from the sale of businesses could actually end up worse off, as any excess will now be taxed at 28%.
