Investors’ relief - how it works

A useful tax relief from capital gains tax

Investors’ Relief (IR) was introduced for qualifying investments made on or after 17 March 2016.

The relief which draws elements from both the Business Asset Disposal Relief (BADR - formerly Entrepreneurs’ Relief) and Enterprise Investment Scheme (EIS) legislation is aimed at encouraging entrepreneurial investors to inject new capital investment into unquoted trading companies in situations where the BADR or EIS/Seed EIS (SEIS) reliefs do not apply.

Why is it particularly relevant now?

The lifetime limit for BADR was reduced from £10m to £1m for disposals that took place on or after 11 March 2020, meaning that for serial investors in particular, access to the 10% capital gains tax (CGT) rate has been significantly restricted. The IR lifetime limit remains at £10m.

One of the requirements for the relief is a three-year holding period, meaning that the earliest possible claim could not be made until the start of the 2019/20 tax year.

Investors’ relief in brief

• Investors’ relief (IR) offers a 10% CGT rate.
• IR can apply to disposals of shares in an unlisted trading company or the holding company of trading group
• IR will only apply to gains on shares subscribed for by the investor (or their spouse or civil partner).
• A lifetime limit of £10m gains applies.
• Neither the investor, nor anyone connected with the investor, can be an officer or employee of the company.
• The shares must be ordinary shares, subscribed for and fully paid in cash, and held for at least three years from 6 April 2016.
• 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.

When might the relief apply?

The relief is especially useful in the following circumstances:

• For investors who have used their lifetime BADR entitlement in full.
• In attracting investment into unlisted companies whose trade is excluded from SEIS or EIS, (such as hotels, care homes, property development, etc), or where a company has outgrown those reliefs.
• In acting as a safety net for investors whose shares initially qualified under SEIS or EIS, but have since become disqualified.

As a general rule, the qualifying conditions are simpler than those that apply to the EIS, and may allow much wider use of the relief - for example, in the context of transactions funded by venture capital and other financial investors.

Particular points to note

• Unlike BADR, there is no minimum qualifying percentage holding.
• The relief is separate to BADR, and has its own £10m lifetime limit.
• The company must have been a trading company or the holding company of a trading group throughout the entire shareholding period (but there are no restrictions on the type of trade).
• Ordinary shares are any shares that form part of the company’s share capital, other than those which carry a right to a fixed dividend, but have no other right to a share in the company’s profits.
• The shares must not be listed on a recognised stock exchange. For this purpose, shares listed on the alternative investment market (AIM) are regarded as unlisted.
• Many of the requirements apply throughout the period in which the shares are held. For example, investors must have held the shares continuously.
• The investor or any person connected with them must not have been an officer or employee of the company throughout the period of ownership. (NB: This requirement does not apply in certain situations).
• A person ‘connected’ with the investor means, broadly speaking, business partners, the individual’s spouse or civil partner, relatives (ie brother, sister, ancestor or lineal descendant), or the spouse or civil partner of a relative.
• IR shares become non-qualifying shares if the investor receives value, other than insignificant value, from the issuing company at any time in the period beginning one year before the date that the shares were issued and ending immediately before the third anniversary of the issue date.

Comparison of current tax reliefs

The commercial background to any potential investment will determine the availability of reliefs but, where flexibility exists, individuals are likely to want to consider the relative pros and cons of different reliefs.

	EIS	BADR	IR
Maximum investment	£1m a year1	None	None
Income tax relief	30%	None	None
CGT	0%	10%	10%
Cap on gains relieved	None	£1m	£10m
Income tax loss relief	Yes	No	No
Reinvestment/ rollover relief	Yes	No	No
Ownership	No more than 30%	More than 5% 2	None
Employee/ director involvement	‘Business angels’ only 3	Required	Not permitted 3
Holding period	3 years	2 years	3 years
Use of pre-existing shares 4	No	Yes	No
Complexity of qualifying tests	High	Low	Low

 

1. Up to £2m if at least £1m is invested in “knowledge Intensive” companies.
2. Unless relief is claimed pursuant to an EMI share option.
3. The ‘business angel’ exemption allows directors to qualify if certain conditions are met. 
4. Employment/directorships by connected persons is not permitted.
5. ie newly issued shares are required for IR and EIS, but not for BADR.