Investors Relief (IR) was first introduced in 2016 to provide an incentive for external investors to invest in unlisted trading companies. The incentive is a reduction in the Capital Gains Tax rate from 20% to 10% for qualifying disposals (up to a lifetime limit of £10 million).
The key conditions are as follows:
- The investment must consist of unlisted shares that have been issued on or after 17 March 2016
- The shares must be fully paid up Ordinary shares, and
- The shares must be disposed of on or after 6 April 2019 (held for a minimum period of 3 years)
The relief is available to individuals (and some trustees of settlements), and an important condition of the relief is that neither the investor nor any person connected with the investor can be an employee of the company, or of a company connected with it. The rules around connected persons can be involved and further guidance should be sought on this before considering making an investment.
Most important for some, and unlike Entrepreneurs’ Relief (ER), there are no minimum shareholding requirements. In some limited cases, an investor may be eligible for both ER and IR but this would need to be explored on an individual basis. There also continue to be tax planning opportunities when considering transfers between spouses and civil partners.
The lifetime limit for ER was reduced from £10 million to £1 million last year, but the limit for IR has not reduced. This now makes the relief even more attractive and relevant.
It may be that an investor could have a combination of excluded shares, potentially qualifying and qualifying shares with the same company and as such the gains would require further calculations.
Any claim must be made by the first anniversary of 31 January following the end of the tax year in which qualifying disposals took place, i.e. for disposals during the year ended 5 April 2020, the deadline will be 31 January 2022.
The relief provides a valuable tax break to investors, and opens up opportunities for companies to receive funding that may be ordinarily excluded from SEIS or EIS (alternative investment schemes), on the basis of their excluded activities or size limits.
With complex rules to consider and with a deadline for claiming, please do get in touch if you would like to discuss the relief further at email@example.com or call our Tax Team on 01242 776000 and we can arrange a call back if they are working remotely.