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Investors' Relief: could you benefit from a 10% CGT rate?

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Investors' Relief: could you benefit from a 10% CGT rate?

Many people are aware of the capital gains tax (CGT) savings offered by Entrepreneurs' Relief, but did you know that Investors' Relief also allows individuals to enjoy a lower rate of CGT?

What is Investors' Relief?

Introduced in April 2016, Investors' Relief (IR) is designed to attract new share capital into unlisted companies. IR was billed as an extension to Entrepreneurs' Relief (ER), and the reliefs are similar in providing a 10% CGT rate (rather than a 20% tax rate for higher rate taxpayers) for shareholdings in trading companies. Both reliefs also have the same upper limit, with individuals' qualifying gains for both reliefs subject to a lifetime cap of £10 million.

To qualify for the 10% CGT rate under IR, the shares must:

  • be newly issued and subscribed for by the individual, for new consideration
  • be in an unlisted trading company, or an unlisted holding company of a trading group
  • have been issued by the company on or after 17 March 2016 and have been held for a period of three years from 6 April 2016
  • have been held continuously for a period of three years before disposal.

However, while there are similarities between IR and ER, the potential beneficiaries of the two reliefs are different. ER is aimed at shareholders who own at least 5% of the ordinary share capital of the company and who are also officers or employees in that company, whereas IR is designed for non-working investors.

Who will benefit from IR?

Investors and companies seeking additional capital as an alternative to the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) may want to consider IR as part of their overall investment strategy.

At first sight, the EIS and SEIS look better from the point of view of the investor. These reliefs give income tax relief on the amount invested and a complete tax exemption from capital gains. Conversely, IR gives no income tax relief and a 10% CGT rate. However, IR may be far more attractive to companies seeking investment. The EIS and SEIS are subject to many conditions, including restrictions on the types of trades which qualify, the size of the company, how much can be raised and how and when the monies are invested.

Scenarios in which IR may be attractive to the company raising funds and the investor include:

  • asset backed trades which are excluded from the EIS and SEIS, such as hotels, property development and farming
  • larger companies on the Alternative Investment Market (AIM). These companies are not regarded as ‘listed' and so potentially qualify. Some of these companies could qualify for the EIS but the EIS is restricted to companies with gross assets of less than £15 million before a further share issue.

Claiming the relief

Any claim for IR must be made by the individual on or before the first anniversary of 31 January following the tax year in which the disposal is made. For more information on Investors' Relief, or for advice on any other reliefs that may be available to you, please contact us.