Risk for advisers in Entrepreneurs’ Relief boom
The increase in the Entrepreneurs’s Relief lifetime allowance from £5m to £10m in the 23 March Budget is stimulating a bonanza of tax work, but also carries an increased risk of professional indemnity (PI) claims, according to TAXtv.
The “very surprising” doubling of the already generous £5m lifetime limit from 6 April 2011 to £10m will be very good news for owners and shareholders of valuable companies, said TAXtv lecturer Tim Good. However, he added, only a small number of entrepeneurs are likely to benefit from the Chancellor’s generosity.
A closer look at the costings suggest that the conditions attached to ER may limit its applicability. Treasury estimates show the increase will cost £50m in 2012-13, rising to £100m in 2015-16 - not quite the massive growth stimulus the rhetoric might suggest.
The £5m limit was increased in last year’s emergency Budget and will only apply for disposals from 23 June 2010 to 5 April 2011. Taxpayers who used up the limit will be allowed to make further disposals after 6 April and qualify for the 10% Entrepreneurs’ Relief rate for Capital Gains Tax, but previous disposals in excess of the old limit will not qualify.
Welcome as it is for these taxpayers, the increase also exposes practitioners to increased PI negligence claims. “Last year it was a differential of £80,000. It’s gone up already to £900,000 [28% CGT rate minus 10% ER times £5m], and now it’s £1.8m. That’s the value to punter, but it’s also the maximum amount for a PI claim,” said Good.
There is some political sensitivity about the prospect of rich venture capitalists taking advantage of the 10% Entrepreneurs’ Relief rate, which is reflected in criteria limiting it to those who are both directors and holders of more than 5% equity in a trading company for more than 12 months.
Having too much cash - defined by HMRC as being "substantial in comparison to its total assets" - might also put a company outside of the ER regime for being a non-trading company.
Those criteria have not changed one iota, noted Good, and practitioners should take care to ensure they are met.
Continued...
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Reluctance to grant ER ?
Maybe we've just been unlucky, but in our only two cases so far, the Revenue seems extremely reluctant to agree to ER.
It may well pay to be cautious when advising clients that ER will be available, even in what seem to be blindingly obvious cases. One wonders whether the inspectors are getting instructions from on high to reject all claims initially, reminiscent of that health insurance company in the John Grisham book whose title I cannot remember.
One 'obvious case' is a farmer - dozens of questions were asked, correspondence has gone on for months, and we were flabbergasted by the last letter asking whether we agreed that ER did not apply.
No we did not agree, we said, how can it not apply when the farmer has retired, sold all his land, does not rent any and therefore is not, and can no longer possibly be, farming ? Presumably there must be some misunderstanding ?
Reply still awaited !