What business investment options are capital gains tax friendly?

Business investment is a topical subject at any time of year because there are always many companies seeking investment capital to pursue their growth ambitions. However, for individuals, as the current tax year comes to an end, those who wish to carry out some last-minute tax planning may find the idea of investing in an unquoted company becoming more topical. This blog compares different tax efficient business investment options.

Schemes like the Enterprise Investment Scheme (EIS) and the Seed company version, SEIS for start ups, have proved very popular amongst passive financial investors looking for opportunities which offer both income tax and capital gains tax reliefs. In this case, the right investment situations can offer generous tax relief opportunities.

Benefits of EIS and SEIS as tax efficient business investment options

However, one issue with the EIS and SEIS schemes is that apart from a range of other qualifying conditions, they are restricted to investments in younger companies. What if you want to invest in an older, more established company? More established unquoted companies have struggled to attract shareholder investors such as business angels since EIS and SEIS were launched, but in April 2016, the introduction of the new Investors’ Relief has gone some way to address this imbalance.

Introducing Investors’ Relief

Investors’ Relief is also a tax efficient business investment option and provides a similar level of tax relief as Entrepreneurs’ Relief, albeit they have different qualifying criteria. Both Investors’ Relief and Entrepreneurs’ Relief enable shareholders who meet the (different) qualifying criteria, an opportunity to pay just 10% capital gains tax when they sell their shares, up to a maximum value of £10million each. Although both reliefs are only available for investments in unquoted companies, (note that AIM listing is classified as unquoted for this purpose) there are no restrictions on the amount of investment that can be made.

Entrepreneurs’ Relief has been around for some time now, but Investors’ Relief only became effective from 17 March 2016. The qualifying criteria for this new relief is similar to that for the EIS and is broadly as follows: an investor must subscribe in cash for fully paid up ordinary shares, which much be retained for at least 3 years from 6 April 2016 or a later date. Provided the shares are held for at least 3 years from that date, and they continue to qualify, they will be eligible for the reduced rate of capital gains tax on the investment gains.

Unlike Entrepreneurs’ Relief, there is no requirement to hold a minimum 5% shareholding, but there is a restriction in place preventing any conflict of interests in relation to employment. These rules are complicated but effectively places restrictions on an investor (or any connected person) from becoming a paid employee or director of the shareholding company.

Comparing Investors’ and EIS/ SEIS Reliefs

Investing in a company through SEIS or EIS will offer more generous tax relief opportunities than Investors’ Relief offers, because there are opportunities for income tax relief on investment, together with capital gains tax free growth, plus capital gains tax deferral relief on other gains. However, the rules are stricter, and the investment opportunities are therefore narrower. In addition, as EIS/ SEIS qualifying companies are necessarily less well established, the financial risks may be greater.

For more information on tax efficient business investment options and for information on getting tax relief through EIS, SEIS, Entrepreneurs’ Relief or Investors’ Relief please contact Lesley Stalker by emailing las@rjp.co.uk.