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Investors' relief

Newsletter issue - June 2018.

At the time of the 2016 Spring Budget, the government announced that the existing capital gains tax (CGT) entrepreneurs' relief would be extended to certain long-term investors in unlisted trading companies who had subscribed for their shares. However, when the Finance Bill 2016 was published a few days later, it became apparent that in fact a new relief - investors' relief - was being created. This new relief is designed to complement entrepreneurs' relief by extending the 10% rate of CGT to gains accruing on disposals of qualifying shares by investors in a company who have no connection with the company, subject to a lifetime limit of £10 million.

The extension of the 10% CGT rate to external investors is intended to provide a financial incentive for individuals to invest in unlisted trading companies over the long term, to enable such companies to be able to access the capital that they need for expansion. The relief also applies to certain trustee disposals.

An individual may be able to claim investors' relief and entrepreneurs' relief on the disposal of different shares held in the same company or group. However, the investors' relief shares must be acquired before the investor becomes an employee or officer of the company.

Investors' relief is a completely separate stand-alone CGT relief - it does not have any associated income tax reliefs. It allows the investor to pay the 10% rate of CGT on gains he makes when he disposes of his qualifying shares, if those shares have been held for at least three years. Since this three-year period can only start from 6 April 2016, the first qualifying disposals will not occur until 6 April 2019.

Conditions

There are strict conditions on how and when the investor can become involved as an employee or director of the company.

The investor is permitted to be a shareholder of the company before he acquires the shares that qualify for investors' relief. So on disposal of those shares, the investor may also hold other non-qualifying shares in the same company. This requires a complex set of rules to determine which shares are qualifying shares for investors' relief, and how much of the gain that arises from a particular disposal qualifies for the relief.

The rules are designed to prevent the investor being repaid all or part of his investment before the three-year investment period has expired. To achieve this investors' relief borrows conditions from the Enterprise Investment Scheme (EIS) concerning receipt of value, which stipulate that amounts received in excess of £1,000 will mean the shares do not qualify.

Certain conditions apply to the company, the investor, and the shares and all these must be reviewed if a claim is to be successful.

Investors' relief must be claimed; it is not automatic. The time limit is the first anniversary of 31 January following the end of the tax year in which the disposal takes place. Trust claims must be made jointly by the trustees and the beneficiary.