A surprise in the March 2016 Budget was the extension of entrepreneurs’ relief (“ER”) to a new investors’ relief (“IR”), aimed at external investors into trading companies. Will it be a success?
Some key points:
- Like ER, it provides a reduced 10% capital gains tax rate on up to £10m of lifetime gains (in addition to any that qualify for ER)
- Unlike ER it doesn’t apply to employees, directors, offices holders etc, so is aimed at “hands off” external investors (and care is required over connected persons)
It doesn’t apply to trustees(Edit: the Finance Bill amendments of 13 June 2016 now appear to address this issue, so that it will apply to trustees in limited circumstances)
- The shares need to be held for three years, in an unlisted company (which can include some AIM shares) and subscribed for (newly issued shares) after 16 March 2016
- The company needs to be a trading company but the rules are different to, and slightly lighter than,the ER ones
- As ever, there is anti-avoidance and complexity in the rules
Alternatives to IR include the Enterprise Investment Scheme (“EIS”) which can give a better tax position, including upfront income tax relief, but with more complexity.
An oddity of the new rules could be that an investor subscribes for shares with the intention of IR, then becomes an employee, so no longer qualifies. They may then need to wait 12 months to qualify for the ER 10% rate (if they meet those rules) rather than being exposed to 20% CGT.
At the time of writing the legislation is draft, so do take advice based on the final rules.