Investors’ relief: £10 million of relief still available

As set out in our article ‘Entrepreneurs’Relief cut to £1 million’, the March 2020 Budget saw the lifetime limit for Entrepreneurs’ Relief (ER) immediately reduced from £10 million to £1 million. This relief is available to individuals disposing of a business or shares in their personal trading company. Where available, ER reduces the rate of Capital Gains Tax (CGT) from 20% to 10%.

While this was a disappointing change for many, the reduction to the lifetime limit did not apply to Investors’ Relief (IR) where a separate £10 million lifetime limit remains. IR, the lesser-known branch of the government’s initiatives to encourage entrepreneurial activity, is a CGT relief available on the disposal of qualifying shares in an unlisted trading company. Again, where available, IR reduces the CGT rate to 10%, meaning a potential tax saving of up to £1 million at current tax rates.

How does IR differ from ER?

The criteria for eligibility for ER and IR share many similarities but IR is aimed at incentivising external investment. This means it is not usually available to employees and directors, however it may be available to directors who are not remunerated.

In terms of the shares themselves, they must be ordinary shares issued in exchange for cash on or after 17 March 2016. There is a minimum holding period of three years before the relief becomes available, unlike the two years required for ER.

During the period of ownership, the subscriber should not be an employee or an officer of the company, subject to two exceptions.

Exceptions

• After a period of at least 180 days from subscription, the individual becomes an employee of the company where there was no reasonable prospect of them becoming an employee at the point of subscription.
• The individual takes up the role of an unremunerated (ignoring dividends) director after subscription and they previously had no connection to the company.

Although IR may not be as generous as the more renowned Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) schemes, the relief does extend to industries and trades specifically prohibited for EIS such as farming, hotels and property development.

The future

In the future we may see IR becoming a much more important relief, particularly given the restriction to the ER lifetime limit and following the government taking a more relaxed stance on the investor’s involvement in the company. With potential tax savings available of £1 million, investors who subsequently take a directorship in the company should give careful thought as to whether remuneration for their role is worthwhile in the long run.

More information

The legislation surrounding IR and ER is particularly complex and investors should take professional advice to ensure they do not fall foul of the qualifying criteria. 

For more information on the issues raised in this article or for advice on your individual circumstances please get in touch with your usual Crowe contact.