New tax relief for investors
Investors' Relief (IR) is a new tax relief designed to attract new share capital into unlisted companies. It was announced in the 2016 Budget as an extension to Entrepreneurs' Relief (ER) but the potential beneficiaries of IR are different to the shareholders who are entitled to ER.
Both reliefs are similar in providing a 10% capital gains tax rate (rather than a 20% tax rate for higher rate taxpayers) for shareholdings in trading companies. They also have the same upper limit. Up to £10 million of lifetime gains can be made and be taxed at the preferential rate.
However, ER is aimed at shareholders who own at least 5% of the ordinary share capital of the company and are also officers or employees in that company whereas IR is designed for non-working investors. Late changes to the rules mean that IR may be given in some scenarios where an individual (or someone connected with an individual) is an 'unpaid director' or becomes an employee of the company, but the new relief should be looked at by investors and companies seeking additional capital as an alternative to the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).
At first sight, EIS and SEIS look better from the point of view of the investor. These reliefs give income tax relief on the amount invested and a complete tax exemption from capital gains. IR gives no income tax relief and a 10% capital gains tax rate. However IR may be far more attractive to companies seeking investment. EIS and SEIS are subject to many conditions including restrictions on the types of trades which qualify, the size of the company, how much can be raised and how and when the monies are invested.
Scenarios in which IR may be attractive to the company raising funds and the investor include:
- asset backed trades which are excluded from EIS and SEIS such as hotels, property development and farming
- larger companies on the Alternative Investment Market. These companies are not regarded as 'listed' and so potentially qualify. Some of these companies could qualify for EIS but EIS is restricted to companies with gross assets of less than £15 million before a further share issue.
Please talk to us if you are interested in IR as an investor or you are seeking to raise funds.