Possible extension of Entrepreneurs’ Relief: Consultation wants to hear from Family Businesses

Philip Hammond, the Chancellor, had promised that his Spring statement would not contain tax announcements. He was true to his promise, well almost.

Amongst the usual statements about economic growth, employment prospects and borrowing needs there were congratulatory comments about the numbers of persons that have benefitted from first time buyer stamp duty reliefs and further suggestions that a litter levy may be enacted. On the theme of waste there was also a call for evidence on how the tax system could be used as an incentive to reduce reliance on certain plastics.

Of relevance to the SME sector is the announcement of a consultation on extending the availability of Entrepreneurs' Relief. The Government are concerned that bringing external investors into a family business can dilute the founders down below a 5% stake in a company. As the 5% limit is the minimum required for Entrepreneurs' Relief the Government feel that some businesses may not seek external funding specifically to prevent the founders falling below 5%. The 5% threshold may therefore hold back the seeking of external funds and therefore hold back growth in a business.

There is a consultation which closes in mid-May about the practicalities of allowing the founders to be treated as selling their shares and immediately reacquiring them at the point that they would otherwise be diluted down 5%. This would therefore allow the entrepreneur to “bank” the 5% rate before they are diluted below it.

The cynic may think “well that is just a way of getting money in earlier and leaving reduced tax take for a future Government”. The consultation suggests otherwise as it is making noises about the resulting gain not being payable until such later time as the shares are actually sold and the entrepreneur has cash to pay the tax.

This is certainly a novel solution for a perceived issue and the Chancellor should be applauded for facing it head on.