Entrepreneurs Relief changes from 11 March 2020

Entrepreneur’s Relief- disposals after 11 March 2020

What has changed?

Whilst it was announced in the Budget 2020 that the lifetime allowance would be reduced from £10 million to £1million for disposals made on or after 11 March 2020, at the time of writing, there has been no legislative update in Taxation of Chargeable Gains Act 1992, Section 169N.

However, according to HMRC guidance Business Asset Disposal Relief (BADR) is replacing Entrepreneur’s Relief (ER) and will be effective for disposals made on or after 11 March 2020.

For any disposal qualifying for BADR, the amount of relief available depends on:

• the extent to which gains relate to disposals of business assets (as opposed to investments), and
• the total amount of relief given on any previous qualifying disposals.

How will this affect a claim for relief in the current year?

The lifetime limit of £1 million is not retrospective, so relief cannot be ‘clawed back’ but previous claims are considered when calculating the amount of relief due on the current disposal. Therefore, if ER has previously been claimed and already cumulatively totals more than £1 million, no further relief will be available.

If ER has been claimed in previous years, but the cumulative total is less than £1 million, BADR can be claimed but will be capped to a cumulative total of £1 million, minus any previous ER claimed. For example, if previous ER claimed cumulatively totals £800,000 and there is a current year qualifying gain of £300,000, BADR relief will be restricted to a qualifying gain of £200,000.

What action is required in TaxCalc?

TaxCalc will provide a Check and Finish warning to indicate that ER is being claimed for a disposal made on or after 11 March, therefore the £1 million lifetime allowance will apply. The following steps should be followed:

1. Calculate the cumulative total ER previously claimed.
2. Does the previously claimed ER total exceed £1 million?
   1. Yes - no more relief can be claimed – untick ‘does this claim qualify for entrepreneur’s relief?’

2. 2. No – Deduct the amount of previously claimed ER from £1 million.
3. Is the current year’s qualifying gain less than the amount calculated in step 2b?
   1. Yes – the gain qualifying for entrepreneur’s relief calculated by TaxCalc can be used so no changes will be required.
   2. No - the business percentage use claimed will need to be adjusted according to how much qualifying gain has been calculated in step 2b.

For example, if the amount calculated in step 2b. = £400,000 and the amount of qualifying gain is £500,000, the percentage will be 400,000/500,000 x 100 = 80%.

Enter 80% in ‘Percentage of business use claimed’

TaxCalc 2022 has be updated to reflect the full changes for Business Asset Disposal Relief.