A new tax saving opportunity for investors
Investors Relief is a new capital gains tax break which is designed to encourage investment into small companies. It fills the gap between the Enterprise Investment Scheme (EIS) and Entrepreneurs’ Relief (ER), by extending the benefits of ER for business investors who don’t work in the business. It reduces an investors’ capital gains tax liability from 20% to 10%. How and when can you take advantage of it?
In his Budget 2016 the Chancellor made some big changes to capital gains tax (CGT). One of these was a new incentive referred to as “Investors Relief” (IR). Subject to certain conditions, its offers investors a 10% rate of CGT on gains they make in respect of money they put into businesses. Currently, that rate is only available on gains to which Entrepreneurs Relief (ER) applies and to individuals whose taxable income plus gains are not greater than the basic rate band of tax.
Interaction with an investor’s other tax investment schemes i.e. EIS, ER and Business Property Relief (BPR)
If ER does not apply to a gain or if you cannot claim EIS or Seed EIS relief, then IR provides a valuable alternative, albeit less generous CGT relief compared to EIS and Seed EIS, which are CGT free.
The qualification criteria to obtain EIS relief is tougher than to gain IR. To qualify for IR the company only needs to be a trading company. Unlike for the EIS, HMRC is not concerned with the nature of company’s activities, just that the company is trading. However, the company cannot have substantial non-trading activities, i.e. no more than 20% of company’s activities can be investment activities. The IR qualification criteria appear for a company’s activities are more akin to that of BPR, which offers 100% tax relief from inheritance tax after the shares have been held for more than two years.
What are the conditions?
To qualify for IR your investment must be:
- In new ordinary shares of unlisted trading companies (i.e. not carrying out investment activities) purchased on or after 17 March 2016 for cash consideration. Please note that shares traded on the Alternative Investment Market (AIM) are included in the definition of “unlisted”.
- You or anyone connected with you cannot be an employee of the Company you invest in at any time during the period of share ownership.
- You must own the shares for at least three years from the date you bought them or 6 April 2016, whichever is later, so the earliest date IR can apply is therefore 6 April 2016.
During your lifetime you can claim IR on up to £10 million of qualifying gains, so a generous maximum relief which should be enough for most investors. Please note this does not affect the separate £10 million maximum for Entrepreneurs’ Relief, and vice versa.
John buys 10% of the shares in a friend’s business in May 2016, but is not involved in any other capacity with the business. John sells his shares in November 2019 making a gain of £250,000. He cannot claim ER as he was not an employee or director of the company for the 12 months ending in the sale of his shares, but John can still qualify for 10% CGT rate on the whole £250,000 gain under IR by submitting a claim for IR by 31 January 2021 (due date for 2019/20 tax return, tax period the disposal falls within).
Equally, if John had only bought 1% of the shares in his friend’s business and made a gain of £25,000, unlike ER he does not need to own 5% or more of the company’s ordinary share capital to qualify for IR, and the 10% CGT rate would gain apply on the whole of his £25,000 gain.
Christian Elmes, Partner
Christian Elmes trained at PwC and qualified as a chartered accountant in 1999, before moving to Morgan Stanley (2000-2002) as Associate in the Investment Banking Division (IBD).
He was appointed Director of Finance, Teather & Greenwood Investment Management in 2002 and moved with the Tax Efficient Solutions team to Smith & Williamson in 2004, becoming Deputy head of the department. He left to co-found Enterprise in 2011.
Over the last ten years, Christian has been responsible for developing a number of tax efficient products, particularly Enterprise Investment Schemes (EIS). He is able to lead on tax efficient product development from inception through to completion, because of his financial and tax background and commercial experience.
Christian is competent across a broad range of sectors including, leisure and hospitality, media, property and renewable energy.
Christian is a non-executive board member to a number of leisure and hospitality companies, Casper & Cole Ltd, Wright & Bell Ltd, Ruth & Robinson Ltd, Camm & Hooper Ltd and Darwin & Wallace Ltd.