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Budget 2011: boost for business sellers

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Start-up entrepreneurs and investors in fledgling enterprises are finally being recognised for the greater risk they shoulder thanks to the doubling of entrepreneurs' relief, says a leading broker.

Among a raft of measures announced in Wednesday's Budget to boost business investment and ease the regulatory burden, the move will see business owners pay just 10% capital gains tax, instead of the higher threshold of 28%, up to a lifetime limit of £10m.

However, judging by market observations from seasoned intermediaries in business sales, George Osborne's attempts to boost enterprise, which also include a rise from 20% to 30% in the rate of income tax relief on investing under the Enterprise Investment Scheme, could be undermined by a continuing dearth of credit.

The new entrepreneur's relief threshold, which currently stands at £5m but over the course of a year will have increased by 1,000%, from 1m to £10m, will come into force from 6 April.

The measure, suggests Shaun Sweeney of business transfer agency Turner Butler, will both incentivise and reward entrepreneurs who, rather than simply acquire and manage going concerns, fulfil the harder and riskier task of setting up businesses from scratch.

Reward

Sweeney believes the change is long overdue:

"The government is showing they want business owners to be winners. We've had a number of years where the small business owner has been forgotten about, with the odd scrap thrown to them.

With this change entrepreneurs are incentivised to continuously build and grow businesses

Shaun Sweeney, Turner Butler

"And what we're seeing now is a government that has hopefully taken on board how necessary it is to have successful businesses out there and to reward business owners for creating them.

In years gone by, you could roll over your capital gains - sell a business stoday, say for £1m and invest it in another business, and build another business and defer the capital gains.

There's a skill to creating a business from scratch, which is not the same as managing an existing business. What any country needs to be successful is business owners that can create abuisness from scratch, which are different skills to those needed to run a business.

"Historically, the guys who sell a business get out between three and seven years, and the successful ones get out with a large amount of money. In the past they could roll that money over and go through life without paying the capital gains as long as it was being pumped back into business.

"The last government did away with that, bringing in this relief system. When it was £1m, a seller would pay £1m tax on £2m.

"With this change entrepreneurs are incentivised to continuously build and grow businesses. Now he can make more and create employment and wealth for the community.

"So now we'll see a successful base of people who can create businesses and then sell them on to the type of people who can manage them.

However, if entrepreneurs now have a greater incentive to build profitable businesses, they won't necessarily have the means - unless they have plenty of savings.

"Until more finance becomes readily available the budget isn't actually going to make a massive amount of difference," says Dean Edwards of Dean Edwards and Co. "The reality is there is still next to no finance available for small businesses unless it's an absolute corker with years of accounts.

"What they lent to three years ago without hesitation now fails at application. It isn't anything like the same market.

"We've just had a business where the purchaser got 7% loan to value, the first one we've seen like that for 2.5 years. The rest is people who didn't use the banks, people with money under the bed or family support them. They're cash purchasers and they've kept our business going in recent years."

The extension to entrepreneurs' relief was among a raft of pro-business measures included in George Osborne's first full Budget. The Chancellor also announced a £500 increase in the annual exemption from CGT to £10,600.

And as well boosting the level of income tax relief under the Enterprise Investment Scheme, the coalition is doubling the maximum investment needed to qualify. The maximum investment in a single company has risen from £2m to £10m. Venture capitalists and business angels will be buoyed by the an easing of the conditions necessary to benefit from Venture Capital Trusts.

The size of companies that qualify under both schemes will rise from 50 employees or less to 250 or less, with the gross assets allowed more than doubling from £7m to £15m. As part of the reforms the Chancellor also pledged to consult on simplifying restrictions on which types of investors and shares can apply.

To qualify for entrepreneurs relief people need to own at least 5% of a company and to have worked there for more than a year.

The limit was set at £1m just two years ago, rising to £2m in April 2010 and £5m in June 2010. A three-year moratorium on new regulation for businesses was also announced.

The Treasury estimates the extension to entrepreneurs' relief move will cost around £310m over the course of the parliament.

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