Despite Investors’ Relief (IR) claims not being due until after 5 April 2019, this does not mean they should be ignored. Here are three distinct phases when to consider investors’ relief:
- Prior to the investment;
- During the holding period; and
- At the time of disposal.
Who is investors’ relief aimed at?
IR is not aimed at the entrepreneur, owner manager or employee, that is the purpose of Entrepreneurs’ Relief (ER). Instead, investors’ relief is designed to encourage investment in unlisted trading companies by external investors. By drawing heavily on both the EIS and ER legislation, it provides a 10% rate of capital gains tax with the following conditions:
- The Investor must subscribe solely in cash for ordinary shares in the company;
- The shares must be fully paid up and issued on or after 17 March 2016;
- The shares must be held continuously for at least 3 years, and cannot be disposed of before 6 April 2019;
- The investor cannot be an officer or employee of the company or group (although this is relaxed in certain circumstances);
- The investor cannot receive value from the company in relation to the investment;
- The company shares cannot be listed on a stock exchange;
- The company must be a trading company or holding company of a trading group throughout the holding period.
Shareholders relief comparison table
| IR | ER | EIS | |
|---|---|---|---|
| Maximum investment | No limit (1) | No limit | £1m |
| Income tax relief | No | No | No |
| Ownership | No limit | >5% | <30% |
| CGT rate on disposal | 10% | 10% | 0% |
| Minimum holding period | 3 years | 1 year | 3 years |
| Office or employee | Restricted (2) | Required | Restricted |
- IR has no restrictions on the amount raised or on the size of business;
- Subject to specific rules, an investor may become an officer or employee and potentially claim for both IR and ER.
Key takeaway and next steps
For more information and to understand more about what shareholder reliefs you are entitled to, contact Menzies Business Tax Partner Nick Farmer by phoning 01784 497153 or by emailing nfarmer@menzies.co.uk.