The new Investors' Relief - Just how useful will it prove?
In the March 2016 budget the Chancellor announced an “extension to entrepreneurs’ relief” which will apply to external investors in trading companies who will be taxable on gains on their shares at the rate of only 10% up to a £10m lifetime limit. This limit is in addition to the £10m lifetime limit for entrepreneurs’ relief gains.
However, the 10% rate of tax and £10m lifetime limit are where the similarities between this new ‘investors’ relief’ and entrepreneurs’ relief begin and end. In fact, this new relief closely mirrors the design of the Enterprise Investment Scheme (EIS) in many aspects, including:-
- The relief only applies to newly issued shares, whereas entrepreneurs’ relief can apply to second hand shares bought from an existing shareholder;
- The shares must be held for three years following investment in order to qualify, just like with EIS, whereas the minimum holding period for entrepreneurs’ relief is just one year; and
- The individual must not be an employee or director of the investee company, i.e. must be an external investor as with EIS, which is completely the opposite of the rule for entrepreneurs’ relief.
Therefore, the investors’ relief is not an “extension to entrepreneurs’ relief”, as there will be virtually no situations where a gain qualifies for both and hence has a £20m limit where it is taxed at 10%.
Furthermore, the earliest date on which any disposals could be made where the 10% rate might apply is 6 April 2019 and under current self-assessment rules the CGT benefit would not then be realised in cash terms until 31 January 2021 at the earliest.
Although the EIS legislation is very technical and difficult to adhere to, it is likely that a significant proportion of shares to which investors’ relief applies would have been applicable for EIS as well, in which case EIS would logically be the preferred route given that it grants the investor:
- an income tax reduction for 30% of the investment in shares (up to £1m);
- the option to defer gains made on other assets within a specified period into the shares; and
- full exemption from the CGT charge.
Where a company or investor does not meet all the conditions for EIS, or where the investor is not interested in meeting the cost or administrative obligations of complying with the EIS legislation, investors’ relief will be useful in reducing the CGT applying to gains which do not meet the conditions for entrepreneurs’ relief (perhaps because the investor does not hold 5% and work for the business).
However, given the limited circumstances in which it will prove of benefit, that the benefits will not be seen for a number of years and that the benefit is now a 10% tax saving (following the reduction in the main rate of CGT to 20%) it is the view of the author that this ‘relief’ will not be a game changer but instead will be a ‘nice added bonus’ when it does come into play.
This is intended as a summary and overview of the tax situation and no action should be taken without first seeking professional advice specific to your circumstances.