What is it?
Investors’ relief (IR) was launched in the 2016 Budget as an extension of entrepreneurs’ relief (ER). It allows investors in unlisted trading companies who hold their shares for a minimum of three years to qualify for the 10% rate of CGT on the disposal of unquoted shares, like Entrepreneurs Relief (ER). The lifetime cap for the amount of gains which can be covered by Investors’ relief is £10 million, the same as, but in addition to the lifetime cap for ER.
The relief is intended to encourage investment and entrepreneurial activity in the UK by incentivising individual investors to acquire shares in such companies whereby a reduced rate of capital gains tax (10%) is charged on disposal. There are strict qualifying conditions and unlike ER it is not just tested in the 2 years prior to sale.
Who will it be especially useful for?
- Investors who have already fully utilised their Entrepreneurs Relief entitlement;
- Attracting investment into unlisted trading companies whose trade is excluded from SEIS or EIS such as hotels, property development and property dealing;
- Attracting investment into unlisted trading companies who have outgrown SEIS or EIS limits; and
- Investors whose shares initially qualified for SEIS or EIS relief, but have since become disqualified.
Investors’ relief – summary of key points:
- Provides a 10% capital gains tax (CGT) rate.
- Shares must be fully paid ordinary shares which have been issued to the investor in return for a cash subscription on or after 17 March 2016;
- Since the date of the issue of the shares, the company must have been and continues to be a trading company or holding company of a trading group;
- None of the company shares should be listed on a recognised stock exchange (for example, the London Stock Exchange but not the Alternative Investment Market) at the time the shares are issued;
- Shares must have been continuously held by the investor from the date of issue and for at least three years from 6 April 2016;
- The investor must have subscribed for the shares for commercial purposes and not in order to avoid tax;
- The investor, or any connected persons, cannot be a ‘relevant employee’ (someone who is or has been, from the time the shares were issued, an officer or employee of the issuing company or a company connected with it). The Investor can become an employee of that company at least six months later, as long as that employment was not a condition of acquiring the shares. The investor can be an unpaid director of the company, as long as he had not transferred his own self-employed trade into that company;
- The investor must not receive any significant value from the company in a four-year period that starts one year before he subscribes for the shares. The definition of value in this context is tight and mirrors the strict conditions for EIS shares;
- A lifetime limit IR of £10m chargeable gains applies; and
- IR has no restrictions on the amount raised or on the size of business.
Comparison to other reliefs
Unlike entrepreneurs’ relief (ER), there is no minimum ownership percentage. IR is separate to ER and has its own £10m lifetime limit. In some cases it may be possible for an individual to benefit from both reliefs.
The company must have been a trading company or the holding company of a trading group throughout the entire shareholding period (but there are currently no restrictions on the type of trade). IR can apply to, broadly speaking, any shares in a company other than fixed rate preference shares. But, unlike ER, it cannot apply to other securities such as debts or loans.
The shares must not, at the date of issue, be listed on a recognised stock exchange (and the company must also not have any listed debt securities). For this purpose, shares listed on the alternative investment market (AIM) are regarded as ‘unlisted’.
Restrictions exist (similar to those for EIS) on receiving payments from the company and in relation to persons ‘connected’ with the investor.
There are also complex rules disqualifying the shares in certain cases and the treatment of reorganisations and share for share exchanges may create complications for investors in the context of corporate transactions.
Trusts and partnerships
Changes were made to the original draft legislation to permit IR to be claimed by individuals who hold shares jointly. This is intended to facilitate the use of IR in the context of partnerships and collective investment schemes.
IR was also extended to certain shares held in trust. Detailed conditions need to be satisfied (broadly following the conditions for ER in this regard).
For Investors’ Relief to apply to a disposal made by trustees there must be at least one individual who is an eligible beneficiary and who has an interest in possession that includes the holding of shares immediately before the disposal and throughout the period of three years ending with the date of the disposal. In addition, the eligible beneficiary must not have been a relevant employee of the company. The trust gains qualifying for Investors’ Relief will utilise the £10 million lifetime limit of the eligible beneficiary and, as such, a joint election must be made between the trustees and the eligible beneficiary in order to claim the tax relief.
Business angel exemptions
The legislation also now permits IR to be claimed by individuals who are employed by the company in certain limited circumstances. These are not identical to the provisions for EIS, although they have a similar aim.
- The first exemption is where the investor meets the definition of an ‘unremunerated director’. Broadly, this requires that the director claiming relief cannot receive any benefits from the company, directly or indirectly, except for a small class of permitted payments (eg reimbursement of expenses and a commercial return on money lent).
- A second exemption may apply where an investor subsequently becomes an employee more than 180 days after the shares were acquired and this was not actively contemplated at the time of acquisition.
While these exemptions should be useful in the context of a relatively simple corporate structure, investors in more complex structures (such as those involving private equity or venture capitalist backing) may find it difficult to fall within these exemptions.
Claiming the relief
The relief is not automatic. Any claim for IR must be made by the individual on or before the first anniversary of 31 January following the tax year in which the disposal is made.
The first year this can be claimed is for disposals in the current tax year, 2019/2020 which has a claim deadline of 31 January 2022.
Conclusion
Investors’ Relief is a potentially valuable tax break for unconnected investors who are looking to invest in unlisted trading companies over the medium to long-term.
If you have subscribed for shares on or after 17 March 2016 which you believe meet the conditions for relief, please do let us know.
If you would like advice on Investors’ Relief, don’t hesitate to get in touch with Debbie Wilson on debbie.wilson@hhllp.co.uk or 02079307797 and she’ll be happy to help.
