Five major UK not-for-profit life sciences membership organisations have sent an open letter to chancellor of the exchequer, Philip Hammond, arguing against the recently proposed changes to Entrepreneurs’ Relief.
Response letter
OBN, OneNucleus, BioNow, Medilink Midlands and MediWales penned the letter stating that changes to Entrepreneurs’ Relief are unlikely to help UK biotech and medtech companies.
Entrepreneurs’ Relief is designed to reduce the amount of Capital Gains Tax (CGT) business shareholders pay after selling or disposing of assets. In particular, CGT taxes the profit when a person sells an asset that has increased in value. Entrepreneurs’ Relief comes with a one-year qualifying threshold and is only applied to those who can claim a 5% share in a business. The general rate of CGT on profits in 20%, but Entrepreneurs’ Relief applies a reduced rate of 10%.
However, the letter states that life sciences companies have to raise significant amounts of capital simply to pass regulatory hurdles through development phases.
More so, the companies write that, ‘entrepreneurs frequently find the value of their company does not increase at the rate that they had hoped (even though the valuations for the few companies that ultimately succeed can be exceptional). In addition, such biotech or medtech companies are often founded by more than one founder with founder shares being divided between them (with the university institutions often claiming a significant proportion of the founding shareholding). This means that entrepreneurs behind these companies invariably have to accept that their shareholding will drop to below 5% (and loss of Entrepreneurs’ Relief).’
The letter also states that businesses within life sciences will typically fall below 5% before any meaningful gain in valuation is made, meaning that shareholders will find little benefit from the 10% relief rate.
The signatories of the letter recommend that entrepreneurs should be allowed to retain their relief ‘so long as they have held at least 5% of the shares for at least one year during the period of their entire shareholding.’ The groups also state that the relief should permanently apply to shares acquired up to the point they fall below 5%. This would mean once shares drop below 5%, any further shares would not benefit from Entrepreneur’s Relief, but those gained before that point would continue to benefit.
This change could help result in an increase in the number of entrepreneurs willing start biotech and medtech companies; incentivise entrepreneurs to stay involved in companies for longer; help companies attract more capital whilst ensuring entrepreneurs remain supportive of future financing rounds and help companies grow, further contributing to skilled employment in the life science sector.
John Harris, CEO of OBN, said: “The UK has a vibrant and world-leading life sciences sector that is recognised internationally for its innovation and development capabilities. While progress is being made to support and promote the industry, we believe that more can be done through the Entrepreneurs’ Relief initiative to improve the UK’s competitiveness on the global stage and to enable the creation of world-class companies in the UK from UK science and technology.”
We’ve reached out to Philip Hammond for a comment on the story and will update accordingly.