The fifth recommendation that will eventually form part of the Taxing Wealth Report 2024 has been published.
Like other suggestions in this series, this one is intended to make a change to the UK tax system that helps remove the systemic bias towards those with wealth inherent within it.
This latest recommendation suggests the abolition of what is technically called capital gains tax business asset disposal relief, but which is still popularly known as entrepreneur's relief.
The summary of this proposal says:
Brief summary
This note suggests that:
- Capital gains tax business asset disposal relief, which is still popularly known as entrepreneur's relief, should be abolished.
- This relief does at present offer a 10% tax rate on the first £1 million of gains made by a person during their lifetime when disposing of relevant business assets, which will usually be an interest in a private business.
- The relief is claimed by relatively few people a year and the vast majority of the relief by value usually goes to a relatively small number of claimants. In 2020, just 4,000 claimants enjoyed 73 per cent of the total relief provided by value.
- The relief makes no economic sense. It does not encourage entrepreneurial activity because it provides relief when a business is sold, i.e., when the person making the claim has ceased entrepreneurial activity. As a result, the relief does not encourage entrepreneurial activity but does instead encourage short-termism within the UK economy. This is sufficient in itself to justify the abolition of this relief.
- HM Revenue & Customs estimate that at current rates of capital gains tax this relief now costs £1.1 billion per annum. However, this report suggests that current capital gains tax rates be abolished and that capital gains should be taxed at in come tax rates. That is likely to increase the cost of this relief, and so the amount that might be saved by its abolition, to approximately £2.2 billion per annum.
Discussion
There has been widespread belief for a long time that this relief has been both egregious and economically inappropriate. This is no doubt why the lifetime allowance for this relief was reduced from £10 million to £1 million in 2020, but the remaining relief makes no more sense despite that reduction than it did before the cut took place for reasons noted above. As a result, its abolition is proposed.
Cumulative value of recommendations made
The five recommendations now made as part of the Taxing Wealth Report 2024 would, taking this latest proposal into account, raise total additional tax revenues of approximately £49.9 billion per annum.
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It looks to me as though this is just ‘get rich and get out scheme’ isn’t it?
Totally short term but it is also anti-competitive as well – those buying these firms could be competitors getting free R&D from smaller entrepreneurial firms and thus creating monopoly power.
What a crappy relief this is. No wonder we have so few ‘family firms’.
Based on what I understand, and I may be wrong, it seems to me that there is a need for something that allows business’s to be passed on successfully to new owners as I understand that very few small business’s survive the death or retirement if the founder.
Clearly this may not be a taxation issue.
This is in inheritance tax.
But it’s also largely irrelevant: next generation succession is rarely a good idea and so sale is more useful.
That’s interesting Richard. At the risk of distracting you, could you point me to evidence as to why this is? Apart from Wilko. 🙂
I know that in 2012, a BIS report suggested making handing down family firms harder, and foreign takeovers of those firms easier.
So what we really need is more long-term oriented ownership, regardless of the relationship? How do we encourage that?
I am all in favour of long term ownershipo of SMEs
I do not believe that entrpereneurial and management ability flows through genes
I think ‘Succession’ was built oin the fact it does not. Wilko does rathyer prove it.
So, encouraging retention to grow is good – which entrepreneur’s relief does not do.
If we want to encourage continued wonership and control by the whole company inheritance tax should encourage gifts to worker ownership. That one is on my list.
£2.2bn/year or …
Enough to complete a £20M refurb on half the hospitals in the NHS (930) over the 4 year life of a parliament (£8.8bn budget). New hospitals cost £250-300M according to NHS costing guides (easily Googled) so you might also get very close to the false promise of 40 new hospitals over the life of a parliament (2.2bn gets you 8-9 new hospitals per year). Getting the staff to put in them may still be a problem though).
My point being that some seriously good things can be done with even the lower end of Richard’s proposals. Context is important as most people have no idea whether these sums of money are large or small in the realm of government.
Thanks
I thought one of the arguments for this is that the sort of person who has skills at setting up companies (the Entrepreneur) is not necessarily a good person to carry on running a going concern. By allowing them to check out with a bit more money, the theory is that they can then startup the next business.
So is this reality? Isn’t this what the BBC Dragons effectively do – although I assume some of them do have skills at running going concerns, as well as startups.
Still if just 4000 people are making use of this, it can’t be cost effective for HMRC to have to manage this scheme.
No one is denying them the proceeds of sale – I am just saying they should be taxed appropriately.
I seem to recall that when I did my MBA – a very long time ago – there was a taxonomy of roles that ran from invention to ‘business as usual’ and beyond. I wish I could remember the reference/references. However, one of the points was that the roles were suited to very different sorts of people, skill-sets and temperaments, so a lot of baton passing was needed for success. There were then implications for organisational structures and cultures and different styles of management, leadership and decision making. It would make sense if this also meant different implications,over time, for ownership and taxation.
Superb analysis. Interesting comment on inheritance taxes. Is there more to come?
Yes, much more to come. I have hardly begun….many more suggestions to come as yet.
I dont get the maths here. 4,000 people claiming the relief is £1m @10% (difference between 10% and 20%CGT rate) = 1,000,000 *4,000 = 400,000 gross up by 73% and you get £550m as the annual cost and that assumes they claim the maximum allowance each. How do they get the £1.1bn number? or is my maths wrong?
The data came from HMRC….
You are assuming they all get the same amount, I think – they don’t
And the figure was for when the cap was £10 million