Introduced in the Finance Act 2016 and applicable to shares acquired from 17 March 2016, Investors' Relief will ensure that qualifying investors pay just 10% Capital Gains Tax on disposal of those shares ...
The relief applies to newly subscribed ordinary shares in unlisted trading companies where those shares are held continuously for 3 years and disposed of from the 6th of April 2019. A £10m lifetime Investors' Relief cap will apply in addition to the lifetime Business Asset Disposal Relief cap, so investors can enjoy up to £11m of gains taxed at just 10% during their lifetime.
Unlike Business Asset Disposal Relief, there is no requirement to hold 5% of the shares or voting rights or for the investor to be an officer or employee of the company.
In fact, for Investors' Relief to apply, the investor, and any person connected with them can't be an officer or employee of the company. This is with the exception of two limited circumstances, the main one of which is that they are an unpaid officer of the company, for example, an Unremunerated Director.
An investor is, however, able to receive the following without it being deemed to be remuneration:
- The reimbursement of expenses incurred wholly, exclusively and necessarily in the performance of their role as a Director
- Interest on a loan to the company charged at a commercial rate
- Payment for services provided to the company in the course of a trade or profession which is taken into account in calculating taxable profits. An example of this might be where a director also owns an accountancy practice that provides tax advice to the issuing company
Investors may have to assess on subscribing for shares how optimistic they feel about any potential gain. Do they want to benefit from Investors' Relief in the first place, as this will dictate whether they want to take a remunerated post or not?
As always there are strict qualifying conditions some of which mirror those for Business Asset Disposal Relief and some for Enterprise Investment Scheme (EIS). Great care should be taken by any investor looking to obtain this relief.
In summary, Investors' Relief is available for those that want to invest in a company, but do not want to be actively involved.
Although the EIS provides tax incentives for investors in this area (see my blog post, Raising Funds Under The Enterprise Investment Scheme), not all companies qualify, specifically, those that are asset-backed such as hotels and property development.
In addition, there are restrictions on the size of a company.
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