Investors' Relief

Much has been made of the changes announced to entrepreneurs’ relief (ER) in the Budget on 11 March 2020, which have resulted in the lifetime limit being reduced to £1m of gains, as well as wide-ranging anti-forestalling rules being introduced to counteract ER planning. In contrast, Investors’ Relief (IR) has been left untouched and is still subject to the same £10m lifetime limit as when it was introduced in 2016.

As a reminder, IR looks like something of a hybrid between ER and the enterprise investment scheme (EIS). If claimed (and it must be claimed in the same way as ER, by the first anniversary of the 31 January following the end of the tax year in which the sale occurred), it reduces the rate of CGT from 20% to 10% on up to £10m of gains over a person’s lifetime. As with ER, to qualify the company must be a trading company or holding company of a trading group (plus it must be unquoted, which is not a requirement of ER). In contrast to ER however, it is (in most cases) only available to investors who are not employed by or directors of (or connected with employees / officers of) the company in which the shares are held, and there is no 5% minimum stake to qualify for the relief.

It is possible in certain cases for a non-employee director to qualify for IR, but only if he is “unremunerated”. An otherwise unpaid director who, for example, separately provides consultancy services to the company in question could still qualify as “unremunerated” if the remuneration is considered to be necessary and reasonable, the director pays tax on it and the services are not secretarial or managerial services, and are not of the type of services provided by the company.

To qualify for IR, a shareholding must be subscribed for in cash on or after 17 March 2016, and there is a minimum 3 year holding period from 6 April 2016 to be able to claim the relief (meaning we are now into the time when IR claims could be made on sales). These requirements are similar to the requirements for EIS tax reliefs, but IR may apply where the more generous EIS reliefs (which include complete CGT exemption) are not available as IR is not subject to as many technical availability and clawback conditions as EIS. There are however, as with EIS, restrictions on relief if the investor receives payments from the issuing company. Again, necessary and reasonable remuneration for consultancy services paid to an otherwise unpaid director who provides those services to the company as part of his trade / profession is permitted.

IR is not a very widely known relief, but it should be on your radar where investors are investing in a company or selling shares and for whatever reason do not qualify for EIS tax reliefs, for example because the company’s trade is not an EIS qualifying trade, or the investor already holds too large a stake in the company to qualify for EIS.

There is considerable interest at the moment in the “future fund” announced as part of the coronavirus crisis business measures, which is to launch this month and will provide for smaller companies to access government funding in the form of convertible loans. However under current proposals there are significant potential downsides for companies in obtaining this funding (e.g. a punitive premium on redemption if an exit cannot be achieved in 3 years, and the fact that the funding has to be matched by equivalent convertible loans from investors, which will not (unless changes are made) qualify for EIS / SEIS tax reliefs). We will be providing a separate Tax Bite on the future fund shortly.

If you think IR may be relevant to a proposed investment or sale of shares, please don’t hesitate to get in contact with us for more details.

Posted on 27/05/2020 in Tax News


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