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Investors’ relief

09 October 2017

A further tax relief for external investors in trading companies

Investors’ Relief was introduced in Finance Act 2016, and now comprises part of a patchwork of tax reliefs designed to encourage investment and entrepreneurial activity in the UK. These reliefs contain different qualifying conditions and it will be important for individuals undertaking such activity to understand which reliefs are most appropriate, how they interact with each other, and whether possible future actions might jeopardise relief.

Investors’ Relief (IR) is, in some ways, less restrictive than the Enterprise Investment Scheme (EIS) and we would expect it to be attractive to many taxpayers if the qualifying conditions can be satisfied.


Investors’ relief in brief

  • IR offers a 10% capital gains tax (CGT) rate.
  • A lifetime limit of £10m gains applies.
  • It can apply to disposals of shares in an unlisted trading company or the holding company of a trading group.
  • The shares must be ordinary shares, subscribed for and fully paid in cash, and held for at least three years from 6 April 2016.
  • There are restrictions on the ability of investors to be employees or directors of the company.
  • The shares must have been issued and subscribed for at arm’s length for genuine commercial reasons and not as part of a ‘tax avoidance’ arrangement.


Qualifying rules

Unlike entrepreneurs’ relief (ER), there is no minimum qualifying percentage shareholding. 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. 


Comparison of 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.





Maximum investment

£1m a year



Income tax relief








Cap on gains relieved




Income tax loss relief




Reinvestment/ rollover relief





Less than 30%

More than  5%1


Employee/ director involvement

‘Business angels’ only2


‘Business angels’ only3

Holding period

3 years

1 year

3 years

Use of pre-existing shares4




Complexity of qualifying tests




  1. Unless relief is claimed pursuant to an EMI share option.
  2. The ‘business angel’ exemption allows directors to qualify if certain conditions are met. 
  3. As 2., but the conditions that need to be satisfied are different (see below).
  4. Newly issued shares are required for IR and EIS, but not for ER.


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), which require an individual beneficiary to have held an interest in possession and not be a relevant employee.


Business angel exemptions

Following a period of lobbying, the legislation 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). The investor must also not have been connected with the company, nor have been involved in carrying on the trade (eg if it were unincorporated).  
  • 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.


Using the relief

We expect the relief to be especially useful for:

  • Investors who have used their ER entitlement in full.
  • Attracting investment into unlisted companies whose trade is excluded from SEIS or EIS (such as hotels, property development and property dealing) or where a company has outgrown those reliefs.
  • Investors whose shares initially qualified under SEIS or EIS, but have since become disqualified.

Although the conditions for IR are more straightforward than some other reliefs, there remain significant risks that investors will be denied relief by an inadvertent failure to satisfy conditions, and it will be important to take timely advice.

For help and advice on any IR issue please get in touch with your usual BDO contact or Chris Chapple.