An introduction to Investors’ Relief (IR)

In the third of a series of blogs, Roger Phillips, director in PM+M’s tax team, provides an introduction to Investors’ Relief (IR).

Investors’ Relief can offer a potential tax saving of up to £1m for qualifying investors over their lifetime. This is an often-overlooked relief which is certainly worth having if you can meet the conditions.

As many people will be aware, the benefits of Business Asset Disposal Relief (‘BADR”), (formerly known as Entrepreneurs’ Relief), the 10% CGT rate on qualifying gains of up to £1m realised by an individual during their lifetime, have been somewhat trimmed back over recent years.

Many individuals may have already used their lifetime allowance, meaning a 20% CGT rate on gains that may once have qualified for the relief.

A generous, but often overlooked CGT relief was introduced in 2016 which, in certain circumstances, can offer the opportunity for individuals to realise additional lifetime capital gains at 10% on £10m of “qualifying gains.”  This relief is known as “Investors’ Relief” (“IR”). It is entirely separate to BADR and therefore the £10m limit is in addition to the £1m BADR limit.

Conditions for the relief

IR applies where a “qualifying person” crystallises a capital gain on a holding, or part of a holding, of “qualifying shares” in a company.

For the purposes of the above, shares are “qualifying shares” if they satisfy the following conditions:

a) The shares are newly issued shares in an unlisted trading company (or the holding company of a trading group).

b) The shares must be “ordinary shares” – i.e. preference shares wouldn’t qualify

c) The consideration payable by the individual to acquire the shares must have been made in cash to the company (for example, a loan capitalisation wouldn’t work).

d) The shares must be issued at “arms-length” and for genuine commercial reasons and not as part of a tax avoidance arrangement.

e) The shares must have been issued after 16 March 2016 (this being when IR was introduced).

f) The investor needs to hold the shares continuously from the date they are issued until immediately before the sale – and they need to hold them for at least 3 years to qualify for IR. We have therefore only seen investments that qualify for IR being crystallised post-March 2019.

g) At no time in the share-holding period can the investor, or a person connected with them, be an employee of the company (although they can become an unpaid director – e.g. this might suit “angel investors”).

Unlike BADR, there is no minimum shareholding requirement.

Interaction with EIS and SEIS

There are some similarities between the conditions that need to be met to qualify for IR and other reliefs, such as BADR, as well as reliefs under the Enterprise Investment Scheme (EIS) and the Seed EIS.

As we have seen in earlier articles, the conditions to qualify for EIS/SEIS are very strict and can often be fallen foul of.

It might therefore be the case that in some instances, an investment that has narrowly failed to meet the conditions for a tax-free sale under EIS/SEIS, might actually meet the conditions for IR. Such cases should be reviewed.

Summary

If you are considering investing in a company, and you would like to discuss what tax reliefs may be available to you either at the outset or when you ultimately realise that investment, do get in touch.

It is vital to get the form of investment correct at the outset to avoid those reliefs potentially being unavailable in the future.

Please get in touch if you would like to discuss further.

 

This document is for general information purposes only and in no way constitutes advice. By their nature, EIS investments are inherently risky, and you should always seek independent financial advice before investing. You should also seek tax advice prior to investing.