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This publication is available at https://www.gov.uk/government/publications/change-to-the-entrepreneurs-relief-lifetime-limit-for-capital-gains-tax/capital-gains-tax-entrepreneurs-relief-reduction-in-the-lifetime-limit--2
Who is likely to be affected
Individuals who dispose of all or part of their business; individuals who dispose of shares in their personal company; and trustees who dispose of business assets.
General description of the measure
Entrepreneurs’ Relief provides for a lower rate of Capital Gains Tax (10%) to be paid when disposing of all or part of a business where certain criteria are met, subject to a lifetime limit of £10 million of qualifying gains.
This measure reduces the lifetime limit from £10 million to £1 million for Entrepreneurs’ Relief qualifying disposals made on or after 11 March 2020.
There are special provisions for disposals entered into before 11 March 2020 that have not been completed.
This measure improves the effectiveness and value for money of Entrepreneurs’ Relief by reducing the lifetime limit on eligible gains. This change ensures the government continues to encourage genuine risk takers and entrepreneurs’ in a fair way, with over 80% of those using the relief unaffected.
Background to the measure
This measure was announced at Budget 2020.
This measure will have effect for Entrepreneurs’ Relief qualifying disposals made on or after 11 March 2020.
Current law is at sections 169H to 169V of, and Schedules 5B and 7ZA to, the Taxation of Chargeable Gains Act 1992. Section 169N provides that Entrepreneurs’ Relief is available subject to a maximum lifetime limit of £10 million per individual.
Legislation will be introduced in Finance Bill 2020 reducing the Entrepreneurs’ Relief lifetime limit to a maximum of £1 million. The rules will also provide that the lifetime limit must take into account the value of Entrepreneurs’ Relief claimed in respect of qualifying gains in the past.
Rules will also be introduced that apply to forestalling arrangements entered into before Budget day. In such cases the disposal will be subject to the £1 million lifetime cap unless:
The parties to the contract demonstrate that they did not enter into the contract with a purpose of obtaining a tax advantage by reason of the timing rule in section 28 of the Taxation of Chargeable Gains Act 1992, and
Where the parties to the contract are connected, that the contract was entered into for wholly commercial reasons.
In addition, where shares have been exchanged for those in another company on or after 6 April 2019 but before 11 March 2020, and
- both companies are owned or controlled by substantially the same persons, or
- persons who held shares in company A hold a greater percentage of shares in company B than they did in company A and, on 11 March 2020, the personal company test, the trading company and the employee/officer test are met in respect of company B,
Then if an election is made under section 169Q of the Taxation of Chargeable Gains Act 1992 on or after 11 March 2020, the share disposal is to be treated as taking place at the time of the election for Entrepreneurs’ Relief purposes, meaning that the new lifetime limit of £1 million will apply.
Summary of impacts
Exchequer impact (£m)
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These figures are set out in Table 2.1 of Budget 2020 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2020.
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
This proposal is expected to impact individuals who dispose of all or part of their business individuals who dispose of share in their personal company and trustees who dispose of business assets, with gains above the new lifetime limit. This is expected to be 9,000 individuals in total. There will also be an impact on individuals disposing of Enterprise Management Incentive shares that qualified for Entrepreneurs’ Relief, with gains above the lifetime limit. This is expected to be around 120 individuals.
Reducing the lifetime limit on Entrepreneurs’ Relief-eligible gains to £1 million will significantly reduce the cost of the relief, with 17% of Entrepreneurs’ Relief taxpayers being affected by the change and 58% of gains being made ineligible for Entrepreneurs’ Relief. This reflects that the majority of the cost of Entrepreneurs’ Relief is generated by a small minority of very affluent taxpayers’ gains.
The impacts on individuals and families will vary, depending on the value of their gains, income levels and personal circumstances.
Customer experience is expected to stay broadly the same because this measure does not bring new taxpayers into the tax system and does not significantly change processes for existing taxpayers.
Reducing the lifetime limit will affect a small proportion of Capital Gains Tax taxpayers. Entrepreneurs’ Relief claimants tend to be older, male, of above-average means, and include individuals who are selling their business or their company’s shares on retirement.
It is not anticipated that there will be impacts on any other groups sharing protected characteristics.
Impact on business including civil society organisations
This measure is expected to have no impact on businesses or civil society organisations. It only affects individuals and trustees who pay Capital Gains Tax in their personal capacity and personal representatives who pay Capital Gains Tax in that capacity on behalf of an individual or estate.
Operational impact (£m) (HMRC or other)
The operational impacts on HMRC of implementing this measure are in the region of £6 million over the period to 2025.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
This measure will be kept under review through regular communication with affected taxpayer groups.
If you have any questions about this change, contact Capital Gains Tax policy team on Telephone: 03000 510915 or email: email@example.com.