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The all too often forgotten Investors' Relief

Have you utilised your Entrepreneurs’ Relief lifetime limit? If so, you could get an additional £10 million under Investors’ Relief. Therefore it’s important to consider whether you meet the relevant requirements. 

This article is part of our Quarterly Tax Digest for individuals.

 

Last updated: 2 December 2020

 

Investors in unquoted trading companies can benefit from various tax reliefs in the UK on disposal of the company shares. The most commonly known is Entrepreneurs’ Relief, which has now been renamed as Business Asset Disposal Relief (BADR). Ironically, this new name is a misnomer as BADR is not a relief for the sale of business assets!

About the authors

Ogonna Agwa

+44 (0)20 3972 6620
agwao@buzzacott.co.uk

Rume Oshenye

+44 (0)20 7556 1398
oshenyer@buzzacott.co.uk

This article is part of our Quarterly Tax Digest for individuals.

 

Last updated: 2 December 2020

 

Investors in unquoted trading companies can benefit from various tax reliefs in the UK on disposal of the company shares. The most commonly known is Entrepreneurs’ Relief, which has now been renamed as Business Asset Disposal Relief (BADR). Ironically, this new name is a misnomer as BADR is not a relief for the sale of business assets!

Background on Entrepreneurs’ Relief

Background on Entrepreneurs’ Relief

 

Entrepreneurs’ Relief was reduced from a lifetime allowance of £10 million to £1 million from 11 March 2020. This has materially affected entrepreneurs who were considering a sale after this date where the capital gain will exceed £1 million. The Office of Tax Simplification (OTS) have also suggested the government should consider increasing the shareholding to qualify for the relief from 5% to 25%. These investors are now facing a reduced relief and the impact of an additional 10% Capital Gains Tax (CGT) on their capital gains above £1 million. If CGT rates are realigned with income tax rates in the future then this could mean an increase of up to 45%.

When can you utilise Investors’ Relief?

When can you utilise Investors’ Relief?

Not a lot of people are familiar with Investors’ Relief; however, it’s now potentially a far more attractive relief for investors. Investors’ Relief was introduced in the Finance Act 2016, and was designed to encourage and strengthen entrepreneurial investment in the UK.

 

Where an individual makes a disposal of shares in an unquoted trading company, Investors’ Relief can be claimed to relieve any gains which will then be taxed at 10%. This will be for gains up to a lifetime limit of £10 million per investor. As you can see, this relief is similar to BADR; however, with fewer conditions to satisfy. The conditions for Investors’ Relief are as follows:

  • The shares must be issued on or after 17 March 2016 and held continuously for a period of at least three years and sold after 6 April 2019.
  • The shares must be new ordinary shares subscribed for by the individual for cash in an unquoted trading company.
  • The investor usually must not be an employee or director of the company during the three year period, except under certain circumstances (i.e. Business Angels).
How to make an Investors’ Relief claim

How to make an Investors' Relief claim

It’s important to note that the claim for Investors’ Relief must be made to HMRC on your tax return by the first 31 January following the tax year in which the disposal took place. For example, for a business disposal that takes place in the 2020/21 year (i.e. a disposal made between 6 April 2020 and 5 April 2021), the deadline to make the claim is 31 January 2023.

The lifetime limit of £10 million for Investors’ Relief is separate to the lifetime limit of £1 million for BADR. Appreciating the similarities of the requirements of each relief and provided that the conditions for both are met, an individual that realises gains that exceed £10 million could potentially enjoy both reliefs on the same disposal.

One positive thing to take away from Investors’ Relief is that you do not have to hold a minimum 5% shareholding in order to qualify for relief. Thereby opening up the ability for a larger pool of investors to access the relief.

A common pitfall to be aware of

A common pitfall to be aware of

There are instances where the relief will be withdrawn even when the investor met the conditions at the time of the investment. This may happen where the investor starts to receive payments as a director, or becomes a ‘relevant’ employee of the company during a group reorganisation or takeover, or by receiving remuneration.

The future of Investors’ Relief

The future of Investors' Relief

Entrepreneurs’ Relief certainly seems to have been popular, with 276,000 taxpayers claiming the relief on £62.8 billion of capital gains in 2018/19 based on HMRC statistics. The reason not many people have used Investors’ Relief so far is that the first investors would have only become eligible in 2019 due to the requirement to have held the shares for three years. It’s too early to say how many taxpayers will be making the most of this relief until 2019/20 and subsequent years’ tax returns are filed.

 

However with Rishi Sunak’s recent proposal to consider abolishing certain tax breaks for investors, this could mean that Investors’ Relief may not be around for much longer, or be reduced materially. So what will this mean for future investment in the UK?

Speak to an expert
Speak to an expert

As the legislation surrounding the conditions can be quite complex, careful consideration and advice will need to be sought in order to ensure the correct application of the relief. Therefore, please consult one of our tax experts in order to discuss your specific circumstances.

Speak to an expert
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