The key message for Private Equity (PE) backed management teams is that in most cases there should not be a material adverse impact as regards the taxation of their interests in management equity plans. Reducing the ER limit, rather than abolishing this incentive to grow businesses, is positive for stakeholders in the PE market.
However there was a further change to the Entrepreneurs’ Relief (“ER”) 10% capital gains tax (CGT) regime, following on from restrictions to ER announced in previous Budgets.
The lifetime limit for ER has reduced from £10m to £1m of qualifying gains. The impact for PE management teams is likely to be less severe than the changes that were announced in the 2018 Autumn Budget that led to many managers ceasing to meet the ER qualifying conditions.
The reduction is effective immediately, meaning accrued gains above £1m (but less than £10m) that previously qualified will effectively be taxed at up to 20% (the headline rate of CGT) when the securities are sold at a gain, rather than at 10%.
The UK’s headline CGT rate of 20% remains a competitive tax rate when compared to similar tax rates in other major economies*. We therefore do not expect a significant impact to the desirability of the UK as a place to work as a result of this change. A robust approach to initial valuations of shares and making valid tax elections will remain fundamental. With a lifetime limit of £1m, ER will remain of interest to managers who do meet the conditions, being equivalent to £100,000 in cash tax saving per person.