Slashing Entrepreneurs’ Tax Relief ‘a significant disincentive to invest’ says industry investor

Last week’s Budget announcement by Chancellor Rishi Sunak to slash tax relief for entrepreneurs has been criticised by an investor in recruitment start-ups as “a significant disincentive to invest in and grow high-risk small business”.

Entrepreneurs’ Tax Relief (ER) was originally introduced to encourage people to invest and grow their businesses by allowing business owners to pay a reduced 10% rate of capital gains tax on any profits they make when selling their business, instead of the typical 20% up to a lifetime limit of £10m.

However, following the chancellor’s announcement that took place in most cases with immediate effect, the lifetime tax allowance for claiming this tax relief was reduced to £1m, meaning that the amount that entrepreneurs are able to reduce their tax bill is now limited to a maximum of £100k compared to £1m previously.

Responding to the announcement, Nick Hall-Palmer, director of Orchard Venture Partners, told Recruiter: “It is a significant reduction in the incentive for wealthy individuals to put their money into the high-risk small business sector and to grow a business to make some serious money.

“It doesn’t seem to encourage and reward entrepreneurial, and if I were thinking of selling a business, I would be pretty disappointed by it.”

However, John Bissell, senior partner at LBA, who buys and sells recruitment companies, told Recruiter: “The chancellor’s announcement to cut Entrepreneurs’ Tax Relief from £10m to £1m, rather than scrap it altogether, makes sense. The real value of the relief is felt not by the super-rich – they use tax havens to shelter their wealth. The real value is to owners of small and medium-sized businesses, most of whom will still enjoy significant tax relief when they sell their businesses.”

John Bell, from insolvency firm Clarke Bell, whose clients include contractors who have their own limited companies, told Recruiter that while “the change to Entrepreneurs’ Tax Relief to reduce lifetime allowance brings it into line with the maximum pot allowed in pension schemes and recognises that many small business owners have their pensions in effect held within their businesses, it does nothing to encourage risk-taking entrepreneurs”. 

Bell added: “It is not fair for an entrepreneur who has built up reserves of over £1m, to find out that their ER lifetime allowance has immediately been limited to £1m.

“A fairer approach would have been to say that this new lifetime allowance is eligible for a company that starts trading from today – ie. the date the new measure comes into place.”

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