Investors’ relief was introduced under the Finance Act 2016 for investors in unlisted trading companies who hold their shares for a minimum of three years.
The relief is intended to incentivise individual investors to acquire shares in such companies whereby a reduced rate of capital gains tax is charged on disposal.
Investors who may not be able to take advantage of either the SEIS or EIS tax reliefs may be able to instead qualify for investors’ relief as an alternative.
How investors’ relief works
Under investors’ relief, individuals who realise chargeable gains upon the disposal of ‘qualifying shares’ (shares which satisfy the below listed criteria) or of an interest in shares will have 10% of CGT applied to such gains with a lifetime limit of £10 million. Note that this limit is separate from and additional to the lifetime cap on gains which qualify for entrepreneur’s relief.
Investors’ relief is regarded in some ways as being less restrictive than the Enterprise Investment Scheme tax reliefs as the rules are simpler and there are fewer potential pitfalls.
Investors’ relief will be applicable where there is a disposal of shares or a disposal of an interest in shares in a company where the following conditions are met:
- Shares must be fully paid ordinary shares which have been issued to the investor in return for cash on or after 17 March 2016;
- 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;
- 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;
- 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; and
- 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).
Investors’ relief can be utilised by any ‘qualifying person’. A ‘qualifying person’ means an individual or trustees of a settlement. Note that individuals holding shares jointly can also claim the relief.
One should further bear in mind that a ‘relevant employee’ does not include the following persons:
- Someone who becomes an employee after the first 180 days of the relevant period and is not a director of the issuing or connected company. There must also not have been any real prospect from the outset of such a period that this person would become an employee during the relevant period; and
- A person who is solely an ‘unremunerated director’ (a director who does not receive a ‘disqualifying payment’ during the relevant period) as long as neither they nor anyone connected to them have previously been involved with either the company issuing the shares or a connected company.
A ‘disqualifying payment’ is one which is any type of payment other than any of the following:
- A reimbursement for expenses incurred for carrying out their duties as a director (for example, travel);
- Interest which represents no more than a commercial return on money which has been lent to the company issuing the shares (or a related person);
- Dividends which do not exceed a normal return;
- Payments for goods supplies which do not exceed their market value;
- Rent for property occupied by the issuing company (or a related person) provided it does not exceed a reasonable commercial rent for the same; and
- Necessary reasonable remuneration paid for ‘qualifying services’ (any service other than those which are secretarial or managerial or not provided by the recipient) provided to the company issuing the shares or related person in the course of a trade in the UK.
Investors’ relief has no minimum shareholding requirement unlike with entrepreneurs’ relief.
It is important to note that shares will be excluded from investors’ relief if the investor receives value from the company (excluding insignificant value), at any time during the restriction period (this is from one year prior to the shares being issued and ends on the third anniversary of the issue date).
Making claims for relief
To make a claim for investors’ relief the claim must be made by the first anniversary of 31 January following the tax year in which the disposal is made. Note that there is no prescribed statutory clearance process in order to claim investors’ relief, however in some situations it could be prudent to contact HMRC for further guidance in respect of the same.