Sarah Laing examines the tax advantages of a relatively new relief aimed at providing a financial incentive for investment in unlisted trading companies.
In the 2016 Spring Budget, the government announced that the existing capital gains tax (CGT) entrepreneurs' relief (ER) would be extended to certain long-term investors in unlisted trading companies who had subscribed for their shares. However, when the Finance Bill 2016 was subsequently published a few days later, it became clear that rather than enhancing the existing relief, a new relief was in fact being created. This new relief is now known as ‘investors' relief'.
Broadly, its purpose is to complement ER by extending the 10% rate of CGT to gains accruing on disposals of qualifying shares by investors in a company with which they have no ‘connection’ (as defined), subject to a lifetime limit of £10 million. It is hoped that the relief will help attract longer term financial investment, thus enabling companies to access the capital that they need for expansion.
Investors’ relief is a completely separate stand-alone CGT relief; it does not have any associated income tax reliefs. It allows the investor to pay the 10% rate of CGT on gains he makes when he disposes of his qualifying shares, if those shares have been held for at least three years. Since this three-year period can only start from 6 April 2016, the first qualifying disposals will not occur until 6 April 2019.
An individual may be able to claim investors’ relief and entrepreneurs’ relief on the disposal of different shares held in the same company or group. However, the investors’ relief shares must be acquired before the investor becomes an employee or officer of the company.
The investor can subscribe for the shares jointly with another person, which is often a spouse or civil partner. To maximise the amount of relief available, prior to the sale it may be worth considering transferring shares to the spouse/civil partner (if they are living together at the time of the transfer).
Example: Share
transfer between spouses
Seb is planning to dispose of his entire shareholding
in ABC Ltd in 2025, which is expected to produce a gain of £14 million. He
subscribed for the shares in 2020 and the gain qualifies for investors’ relief.
The gain will potentially exceed the lifetime limit of £10 million.
Before the disposal takes place, Seb transfers half of
his shareholding to his wife Grace. Grace ‘inherits’ Seb’s shareholding period
for those shares. The sale of the shares in 2025 results in a gain of £7 million
each. This is below the £10 million lifetime allowance that they are each
entitled to. They both qualify for investors’ relief and subsequently pay CGT
at 10% on the entire gain.
Restrictions
As is to be expected, there is a plethora of strict conditions for defining qualifying investors, companies, and the shares themselves. In particular, the shares must have been issued and subscribed for at arm’s length for genuine commercial reasons, and not as part of a scheme or arrangement the main purpose or one of the main purposes of which was the avoidance of tax.
There are also strict conditions on how and when the investor can become involved as an employee or director of the company. The investor is permitted to be a shareholder of the company before he acquires the shares that qualify for investors’ relief. So, on disposal of those shares, the investor may also hold other non-qualifying shares in the same company. This requires a complex set of rules to determine which shares are qualifying shares for investors’ relief, and how much of the gain that arises from a particular disposal qualifies for the relief.
The rules are designed to prevent the investor being repaid all or part of his investment before the three-year investment period has expired. To achieve this, investors’ relief borrows conditions from the enterprise investment scheme concerning the receipt of value, which stipulate that amounts received in excess of £1,000 will mean the shares do not qualify.
Practical Tip:
Investors’ relief must be claimed; it is not automatic. The time limit is the first anniversary of 31 January following the end of the tax year in which the disposal takes place. Trust claims must be made jointly by the trustees and the beneficiary.
Sarah Laing examines the tax advantages of a relatively new relief aimed at providing a financial incentive for investment in unlisted trading companies.
In the 2016 Spring Budget, the government announced that the existing capital gains tax (CGT) entrepreneurs' relief (ER) would be extended to certain long-term investors in unlisted trading companies who had subscribed for their shares. However, when the Finance Bill 2016 was subsequently published a few days later, it became clear that rather than enhancing the existing relief, a new relief was in fact being created. This new relief is now known as ‘investors' relief'.
Broadly, its purpose is to complement ER by extending the 10% rate of CGT to gains accruing on disposals of qualifying shares by investors in a company with which they have no ‘connection’ (as defined), subject to a lifetime limit of £10 million. It is hoped that the relief will help
... Shared from Tax Insider: Investors’ Relief: Enhancing ER’s Appeal?
