Are you an investor in a private trading company that doesn't qualify for the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS)?
Have you explored other potential investment tax breaks available to you?
Investors' Relief is perhaps a less well known scheme in the maze of intricate laws and regulations that make up the UK tax system. It works whereby it can help reduce your exposure to taxation on any gains arising from your investment in unlisted, trading companies.
This is why we've written this blog post, to provide you with knowledge and information as to how you may be able to access this tax relief so that you can retain more of your hard-earned gains resulting from the disposal of shares. It's likely therefore to be a potentially very useful opportunity for those investors that qualify, and for entrepreneurs and owner managers pitching for investment.
Read on to find our more about the nuances of Investors' Relief and insights into its functionality and benefits. This page specifically covers:
What is Investors' Relief?
Investors' Relief (IR) is a Capital Gains Tax (CGT) incentive available to investors to help reduce their tax liability resulting from the qualifying gains made from the disposal of shares in unlisted, private trading companies. The tax break is designed to promote investment into private trading companies where tax reliefs such as Business Asset Disposal Relief (BADR) or EIS/SEIS don't apply.
IR works whereby CGT is reduced on eligible gains from the disposal of ordinary shares in private trading companies. Usually CGT rates are applied at 20% for higher-rate tax payers and 28% for additional-rate taxpayers, but IR reduces this to 10%.
The essential point to note here is that CGT applies to the uplift, the gain, that you've made in selling your shares. If you purchase qualifying shares for £10,000 and then sold them for £50,000 over 3 years later then the reduced IR rate of 10% only applies to the £40,000 gain. Your tax bill would then be £4,000.
If we then compare to higher-rate taxpayers who don't qualify for IR then at 20% on £40,000 their liability is double at £8,000. For additional-rate taxpayers at 28%, it's £11,200. The tax relief therefore represents potentially very significant savings given the possible sums of investment likely involved.
Of note, there is a lifetime limit on such qualifying gains of £10m per investor. While this blog primarily focuses on external investors, it’s important to highlight that IR also serves as a valuable tool for entrepreneurs seeking private investment, particularly where SEIS or EIS isn't available.
IR can play a useful role in incentivising external investment in UK-based, unlisted trading companies, which is vital for the growth and development of SMEs. By offering a reduced CGT rate of 10% on qualifying gains, IR makes backing these companies more attractive to investors, increasing their likelihood of investing in innovative and growing enterprises.
Investors can't be officers or employees of the company in question at the time of purchasing the shares. Unremunerated directors and/or individuals who become employees in the future may qualify for this relief under specific conditions, albeit careful planning and consideration are essential.
The relief is available only to individual investors and some trustees of settlements. It doesn't apply to companies or discretionary trusts.
The shares must be ordinary shares that were issued either on, or after, 17 March 2016 when the business in question was incorporated. It has to be a new company and the shares must also be fully paid up in cash and have been held continuously.
Ordinary shares are those that form part of the company’s share capital. This doesn't include other types and class of shares that for example could carry a right to a fixed dividend albeit with no other right to a share in the company’s profits.
There is also a holding period condition whereby the ordinary shares must be held for at least 3 years prior to disposal. There is no minimum qualifying percentage holding. Disposals were eligible for this tax relief from 6 April 2019.
In terms of company status, the company in question has to be a new trading company, or the holding company of a trading group, for the full duration of share ownership by the investor. There are no restrictions on the type of trade the company conducts.
Investors have to make a claim on 31 January in writing to HMRC, marking the first anniversary following the end of the tax year in which the qualifying disposal took place. As an example, if you have qualifying disposals where there have been gains within the 2024/25 tax year, then your claim to HMRC must be made by 31 January 2027.
The 31 January submission date ties in with the self assessment, online tax return deadline. Assuming they meet the eligibility criteria, each spouse or civil partner is treated separately meaning they can make their own claims up to the lifetime limit.
There are special rules applicable if shares are exchanged for shares in another company. The original shares may be treated as equivalent to the new shares. This has the effect of deferring any CGT liability on any gains until the new shares are subsequently disposed of.
As an alternative, there is a mechanism whereby an election can be made to treat the exchange as a disposal. This creates an opportunity for IR to then be claimed on any qualifying gains when the exchange takes place.
Whilst offering the same reduced rate of CGT at 10%, Business Asset Disposal Relief (BADR) has different qualifying criteria in that it's specific to individuals who are actively involved in running, and managing a business.
IR is specific to external individuals and investors, such as business angels, who don't have any connection to the running of the business, but providing the same tax benefits as those available to employees and directors under BADR. This is so long as the nature of the investment doesn't qualify for other schemes such as SEIS and EIS. Typically, non-qualifying trades for SEIS and EIS include:
There is also potential for investors whose shares originally qualified for SEIS and EIS, but have subsequently been disqualified, to then make use of IR. The below table provides a comparison of the various tax relief schemes, their conditions and their benefits.
| IR | SEIS | EIS | BADR | |
| Maximum investment | None | £200,000 | £1m per year or; £2m if £1m+ invested in knowledge intensive companies |
None |
| CGT liability | 10% | 0% | 0% | 10% |
| Income tax relief | None | 50% | 30% | None |
| Limit to gains relieved | £10m | None | None | £1m |
| Income tax loss relief | No | Yes | Yes | No |
| Reinvestment/ rollover relief |
No | Yes | Yes | No |
| Employee/ director involvement |
Can't be an employee or director | No, but directors can qualify under some conditions | No, but directors can qualify under some conditions | Required |
| Ownership restrictions | None | Up to 30% | Up to 30% | More than 5% |
| Minimum holding period of shares | 3 Years | 3 Years | 3 Years | 2 Years |
| Can apply to pre-existing shares | No | No | No | Yes |
IR offers a significant tax advantage for investors looking to support small businesses. The reduced rate of CGT on qualifying gains encourages long-term investment to help SMEs scale. As an investor you can benefit from a lower tax burden, making it an attractive option if you're looking to maximise investment returns while contributing to developing early stage, innovative enterprises.
For entrepreneurs and owner managers it's a useful tool to help them attract investors to back their organisation and help them grow. Of note, investors should always stay mindful of the changing nature of tax legislation. This is especially the case when it comes to IR and and CGT. The UK tax landscape is constantly evolving, each new budget can bring changes that may potentially impact both the eligibility and benefits associated with various tax reliefs.
With this in mind, be sure to consult with a tax professional to ensure compliance with all the regulations. That way you can understand in full, all the conditions necessary to realise the benefits of any tax reliefs available to the opportunities in question.
The content of this post was created on 26/09/2024 and updated on 01/10/2024.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.
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