The amount of capital gains tax small business owners can potentially save when they sell their business has been cut by 90% for 2020/21.
Entrepreneurs’ relief allows people to pay a reduced 10% flat rate of capital gains tax on any gain made from selling a business, instead of the typical 20% or 28% rate.
A report from the Institute for Fiscal Studies prior to last month’s Spring Budget suggested around three-quarters of the cost of the relief benefits just 5,000 individuals with an average tax saving of £350,000.
In addition, the Federation of Small Businesses (FSB) claimed that of around 43,000 small business owners who claim the tax break each year, 38,000 have gains of less than £1 million.
Armed with those statistics, the Government has reduced the lifetime limit with immediate effect so entrepreneurs’ relief applies to gains of £1m, down from £10m in 2019/20.
The move is expected to net the Treasury an extra £6 billion over the next five years, while capital gains tax receipts are being tipped to soar to around £15.7bn by 2023/24.
Mike Cherry, national chairman at the FSB, said:
“The vast majority of those who claim entrepreneurs’ relief do so on sums of less than £1m, with an average saving of around £15,000.
“For many entrepreneurs approaching retirement, their business is their pension.
“Entrepreneurs’ relief 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.
“Reforming the relief to target it at just the first £1m of a business sale, while scaling it back at the top end, could mark a way forward.”
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