Tax matters and associated liabilities (whether those liabilities are crystallised or potential), must always be considered in divorce/separation matters, particularly where a sale of assets/transfer of ownership becomes necessary to meet either or both parties’ claims.
With the recent announcement of the change to the lifetime limit of Capital Gains Tax Entrepreneur’s Relief potentially impacting on the sale or transfer of business ownership, we asked Forensic Accountant, Suzanne Grant at Stowe Family Law to join us on the blog to explain further.
What is Entrepreneur’s Relief?
Entrepreneur’s Relief (‘ER’) was first introduced by Gordon Brown’s Labour government back in 2008 to encourage and support the establishment of new businesses here in the UK and to encourage overseas owners to move a business here.
Changes to the Capital Gains Tax Entrepreneur’s Relief lifetime limit
ER provides a discounted rate of Capital Gains Tax of 10% to be paid when all or part of a business is disposed of, assuming that certain criteria are met. Previously there was a lifetime limit on ER of £10 million.
Following Rishi Sunak’s budget on 11 March 2020 the lifetime limit for qualifying disposals was reduced with immediate effect from £10 million to £1 million, a drop of 90%. Business owners who have used their lifetime limit pay Capital Gains Tax at standard rates.
Schedule 1 to the Finance Bill states:
“This change ensures the government continues to encourage genuine risk-takers and entrepreneurs in a fair way…”.
It is intended that the funds raised by this tax change will be used towards helping businesses, for example by increasing the employment allowance by one third and increasing tax relief for businesses investing in research and development or buildings and structures.
The impact of the lifetime limit changes
The lifetime limit on Capital Gains Tax Entrepreneur’s Relief has changed over the years from a starting point on introduction in 2008 of £1 million, increasing through a high of £10 million by April 2011. It is now back at its starting level.
The financial outcome of any business sale is determined by many factors other than tax (for example, market conditions and business performance) and the Chancellor expects that 80% of business owners will be unaffected by the reduction in ER.
The changes will predominantly impact on:
Individuals who have gained above the new lifetime limit upon disposal of all or part of their business or disposal of shares in a personal service company
Trustees who are disposing of business assets
Individuals who dispose of Enterprise Management Incentive shares which qualified for ER
An individual can make more than one claim for ER up to the total of the limit prevailing at the date of disposal. Where they have made several disposals, this can complicate the calculation of lifetime limit.
Specialist tax advice for divorcing couples
For divorcing couples, this change to the Capital Gains Tax Entrepreneur’s Relief will have a significant impact where the marital pot includes high-value business assets (with the exception of property investment companies), as the value of those assets reduces because of a higher tax charge arising on actual or deemed business disposal.
Tax can be very complex and the overall impact on individuals and families varies greatly, depending on their personal circumstances, income levels and any taxable gains.
Where applicable, and to ensure that our clients achieve resolution of their financial matters in the most tax-efficient way possible, we always advise that independent tax advice is sought. You can find details of a number of tax experts on our Divorce Directory.
Get in touch
Visit our forensic accountancy service page to find out more about how they support people to protect their assets when going through a divorce.