The £1m Entrepreneurs’ Relief Lifetime Limit
The lifetime limit for Entrepreneurs’ Relief (ER), which is being renamed to Business Asset Disposal Relief, was reduced from £10m to £1m in Rishi Sunak’s first Budget.ER reduces the rate of Capital Gains Tax (CGT) on qualifying capital gains from the main rate of 20% to a relatively low rate of 10%.
From 11 March 2020, an individual will therefore only benefit from ER on a total of £1m of capital gains during their lifetime.Following these changes ER can only deliver a tax saving of £100,000, compared to a tax saving of up to £1m before the limit was reduced.
Farm disposals and development land sales often trigger capital gains significantly in excess of £1m. Careful planning can be taken to minimize the tax liability, but the appropriate planning will depend on what the sales proceeds will be used for.If, for example, the proceeds are to be reinvested in qualifying replacement assets, such as the acquisition of farm land, Roll Over Relief could apply to fully relieve the capital gain such that no CGT is payable on the disposal.
Where the proceeds will not be reinvested in qualifying trading assets and cash gifts are to be made to family members, as part of succession planning consideration should be given to the potential to transfer land into joint names with those family members ahead of the sale.
The capital gain on the sale would then be shared between the landowners and providing the relevant conditions are satisfied, each individual would benefit from their own ER lifetime limit of £1m, creating a potential tax saving of up to £100,000 per landowner.
Example: Mr Brown owns 30 acres of development which is to create a capital gain of £3m on its sale.Mr Brown would like to use the proceeds to fund his early retirement and to gift cash to his two children to help them make property investments.
Where Mr Brown is eligible for ER, the CGT liability would be circa £500,000 on the sale of the land.If, however, Mr Brown transferred the land into joint names with his two children ahead of the sale and they each satisfied the ER conditions, the CGT liability could be reduced to £300,000.This represents an additional £200,000 ER saving due to the two additional landowners.
For ER to apply to each individual, they must satisfy stringent conditions, some of which need to be satisfied for a minimum period of 2 years before the sale.It is therefore important to take advice well in advance of a potential sale to utilise the tax reliefs available.
Each situation is of course different and the optimum use of tax reliefs will depend on each individuals’ specific circumstances.Please do contact us if you would like us to help you consider your own situation.
The content of this article is for general information only and does not constitute tax advice. It should not be relied upon and action which could affect your business should not be taken without appropriate professional advice.
Victoria Paley ACA CTA
Senior Tax Manager
Victoria joined the practice in July 2019 having worked in accountancy and tax in the rural sector since 2010. As a Chartered Accountant and Chartered Tax Adviser Victoria spends most of her time advising family farming businesses on Capital Gains Tax and Inheritance Tax matters primarily in relation to succession planning and capital transactions.
When Victoria isn't working she enjoys being outside with her dog or riding her horse. She also loves to travel and try and make the most of holidays having been to India, Cuba, South America and South East Asia over the last few years. However this is soon to be put on hold as Victoria is expecting her first child in 2021!