During the Chancellors’ last Budget speech in March, he announced that entrepreneurs’ relief would be extended to benefit external investors of unlisted trading companies.
Delving further into the detail, it became clear that rather than an extension, he was actually introducing a new standalone relief, labelled as ‘investors’ relief’.
What is investors' relief?
Investors’ relief provides for a lower rate of capital gains tax (CGT) to be applied to disposals of shares in unlisted trading companies, where certain conditions are met.
Under the current entrepreneurs’ relief rules, one of the main conditions is that the individual holding the shares must be an employee or officer of the company. Conversely, to qualify for investors’ relief, the individual subscribing for the shares must not be an employee or officer of the company.
What are the rates and limits?
CGT at a rate of 10% will be applied to qualifying gains compared to the current rate of 20% for higher and additional rate taxpayers.
Gains available at the 10% rate will be subject to a lifetime cap of £10million. This lifetime cap is in addition to the entrepreneurs’ relief £10million cap. Therefore, up to £20million of gains could be subject to a CGT rate of 10% by a single investor across different investments.
Conditions to qualify
To qualify for investors’ relief, the shares must:
- be subscribed for (e.g. acquired as a new issue of shares by the investor);
- be in an unlisted trading company, or unlisted holding company of a trading group;
- have been issued after 16 March 2016; and
- have been held for at least three years prior to disposal (with the earliest date the three year period can be started from being 6 April 2016).
In addition, and as mentioned above, the individual must not be an employee or officer of the company, nor closely connected to someone who is (e.g. business partners, spouses, parents and children).
In the latest proposals, however, this requirement has been relaxed a little. Unpaid directors and certain employees will still be able to qualify for investors’ relief providing:
they had no previous connection with the company;/there was no intention that the investor would become an employee from the outset; and/they do not actually become an employee within six months of the investment.
Who will benefit from investors' relief?
Advantageous tax reliefs can already be obtained by individuals when they invest in companies that qualify for the Enterprise Investment Scheme (EIS). The tax benefits under EIS include 30% income tax relief on the amount invested in the year of the investment (or the preceding year) and no CGT on disposals of shares held for at least three years. As the tax reliefs are not as beneficial under investors’ relief it could be questioned how widely this benefit would be claimed. However, the conditions to qualify for investors’ relief are much less stringent and it could also be useful for companies that do not meet the qualifying criteria under EIS but want to attract external investors. Similarly, investors who have already exceeded the limits for EIS could look to benefit from investors’ relief.
For investors with lower income and smaller share portfolios the new relief may not offer any additional tax relief. This is because the newly introduced lower CGT rate of 10% (previously 18%) now applies for individuals who have not used their entire basic rate band with their income (i.e. total income of less than £43,000 for 2016/17). Also, each individual has an annual capital gains tax exempt allowance of £11,100 to utilise.