Insights

The Budget 2016 was generally positive for business owners and one change in particular; the extension to Entrepreneurs’ Relief (ER), offers additional tax advantages for business investors. The government has said the new relief has been introduced because it wants to “create a strong enterprise and investment culture and ensure that companies can access the capital they need to expand and create jobs”. In addition, “extending ER to external investors is intended to provide a financial incentive for individuals to invest in unlisted trading companies over the long term”. It is great news for investors who have previously been excluded from other tax reliefs like EIS and who have difficulties accessing ER.

Extension to Entrepreneurs’ Relief

ER is only available to directors and employees, but the extension to ER, in the form of Investors’ Relief (IR), means that external long term business investors can now claim the same type of relief, albeit with different qualifying criteria.

In addition, individuals who invest in companies in which they are either directors or employees, but who are also internal investors in other companies, now have the opportunity to pay capital gains tax at the reduced rate of 10% on lifetime gains of up to £20million by claiming different reliefs on different investments.

ER has been in place since 2008 and is itself a very attractive relief; it allows qualifying business owners and company directors or employees to pay just 10% capital gains tax on the first £10million of qualifying lifetime gains. The qualifying conditions are relatively few and relate to the final 12 months prior to disposal, when the company must be a trading company, the shareholder must be a director or employee, and must have a minimum 5% shareholding and voting rights, unless they acquired their shares through the enterprise management incentive share option scheme.

Eligibility criteria for Investors’ Relief

Investors’ Relief provides an extension for external investors to the 10% capital gains tax rate enjoyed by internal investors by providing that a further £10million of qualifying lifetime gains will be charged at 10% where the following qualifying conditions are met:

• The investment is in an unlisted trading company or holding company of a trading group;
• The shares are acquired by subscribing for newly issued ordinary shares which are issued on or after 17^th March 2016;
• The shares are held for a minimum continuous period of 3 years from 6^th April 2016;
• The investor is not an employee or officer (i.e. company secretary or director) of the company or another company in the same group;

An individual’s qualifying gains for investors’ relief will also be subject to a lifetime cap of £10million.

Whilst IR is an extension to ER and mirrors ER in terms of the relief given – i.e. a chargeable rate of 10% on lifetime capital gains of up to £10m, the qualifying criteria is in fact more akin to the enterprise investment scheme (EIS) which we have discussed in previous blogs. EIS, like IR, is targeted at external investors rather than the internal investors who are able to qualify for ER.

IR is however distinct from EIS in that EIS is more tax efficient; EIS provides the ability to roll over other capital gains against the purchase of shares and to obtain income tax relief on the investment. In addition, if the shares are held for a consecutive 3-year period and the company continues to be a qualifying company, any capital gain arising on the disposal of the shares is tax free. These reliefs are far more attractive than IR which simply provides that capital gains attract a 10% rate of tax, with no other reliefs being available.

However, as with EIS, the shares must be new-issue shares and must be held for a 3-year period, unlike shares which qualify for ER which carry no such investment restrictions, and need only qualify for a 12-month period.

So in summary, ER is as attractive as IR; it is not as attractive as EIS but carries the same, more restrictive qualifying criteria, as EIS. However, there is one over-riding qualifying criteria for EIS which effectively means that many investors don’t qualify for the relief, and this is that investors must not, together with those connected with them, own more than 30% of the company’s share capital. IR does not carry this restrictive condition and for this reason, it will fill a gap for many investors.

Advantages of IR for larger investors

IR is clearly a generous tax relief and it is estimated that it will cost the Treasury £120m for the remainder of this parliament. It will be particularly relevant for investors who do not qualify for EIS, either because they have a larger shareholding or because the companies they invest in are too large, and who can currently only access lower rates of capital gains tax through ER, even though their circumstances are more akin to that of an investor. Now there is a relief specifically targeted at them, and one which enables them, with careful planning, to realise capital gains of up to £20million at the rate of 10% in their lifetime, rather than £10million as currently.

If you are interested in finding out more about the new Investors’ Relief or wish to discuss a company disposal, please contact Lesley Stalker by emailing las@rjp.co.uk.