Black holes and other strange phenomena – will Entrepreneur’s Relief survive?

Don’t worry: a legal blog hasn’t morphed into something that Professor Brian Cox might write (although, if they re-run it, I do recommend the Astrophysics of Light evening class run by St Andrews University). No: it is financial black holes that interest me here.

There was a good article in the April 27th edition of the Economist (A Form 10-K for America’s government) which in turn talked about Steve Ballmer’s USAFacts website. One of the themes is to treat the US government as a company and see what the results looked like. And if it works in the US….

In Britain, there are increasing and vociferous calls and claims on the income that Britain Inc has. The cash out includes both revenue items (such as pension payments, NHS costs and so on) and capital items (such as infrastructure spending and debt repayments). The cash in comes from taxation in all of its forms. But one major (and really rather worrying) difference between UK Inc and your business is the lack of any real accruals. The major example relates to pensions: a 35 year old pays taxes now with the promise of a pension some time after they are 65 (whatever the rules then are). But, today’s income is being used to pay today’s pensioners – not put to one side for the 35 year olds. Their pensions will depend on the people who are now babies paying enough tax to fund those pensions. Put another way, those pensions are completely unfunded: black hole # 1.

Less worrying but more imminent is black hole # 2. Assuming that the Conservatives are re-elected next month (and even I might put some money on that) then they will attempt to balance the current books of UK Inc (including some debt repayment).That’s going to be tough, and at its simplest they will have to (a) cut more (and that will be hard); (b) tax more (and that will be unpopular – but do watch the manifestos); and/or (c) not repay debt (and what does that do to credit ratings?). It’s (b) that I am most interested in here: the potential tax black hole.

We saw in the budget and subsequent about-turn that the Chancellor was trying to raise some of the less obvious taxes in order to plug gaps. The National Insurance paid by the self-employed and tax free dividend income were two targets before “her next door” called the election. But after the election, the new manifesto will be in place; the government will have five years (I assume) to get over any problems caused by changes now; and the black hole still needs filled. And, from the point of view of our clients, the tax – more properly a relief – that worries me most is Entrepreneur’s Relief.

Many of you will know that, subject to meeting qualification requirements, you can sell your business and pay CGT of 10% on the next proceeds. Short of dying, that’s the lowest tax rate in the UK. It encourages people to build up value in their business, keep it in the business and then realise the benefit on sale. But – is that 10% rate tempting? What if it were raised to, say, 15%? The business community would complain, but at 15% it would still be a low rate; it would help the “just about managing” families (who seem to have dropped off the radar); and if a “rich” business person sold their business for £1M and ended up with £850K and not £900K – who are they to complain?

So – where am I going with all of this? Entrepreneur’s Relief results in a low CGT rate and that has been the case for some time. It may be just too tempting a target for the Chancellor. Therefore, there must be a real risk of an increase in the effective rate in the next budget, whenever that is. We would never recommend disposing of a business for purely taxation reasons, but it is part of the mix: what will be your net proceeds of sale now compared with next year? If you are thinking about selling in the near future, have a good think – now.

Back to the real black holes. As I understand it (and my understanding is sketchy despite trying really hard) at time zero, everything in the universe – matter, energy, the whole damn lot – was in a super-concentrated small ball. At least, that’s how I imagined it. The big bang happened and, after an infinitesimally small gap, the universe started expanding broadly in terms of the rules about gravity and so on that we now know about. Today’s question is this: if the universe only started with the big bang, where was the black hole before the big bang? Answers, on a postcard……

Office and meeting rooms

We are re-arranging our space within our Dunfermline office at Crescent House from 15 May 2017. What does this mean for you?

  • our address, phone numbers, etc will remain unchanged, but
  • all future meetings will take place on the ground floor rather than the first floor, so
  • you’ll be directed to turn right at reception next time you visit us!

We look forward to welcoming you in our new meetings rooms soon.