Entrepreneurs' Relief now extended to external investors

In an attempt to further encourage an enterprise and investment culture, and to help ensure that companies have the capital available to expand and create jobs, with effect from 6 April 2016 the Government has effectively extended Entrepreneurs' Relief to external investors in unlisted trading companies.

The ‘extension’, entitled Investors’ Relief, applies a rate of 10% to capital gains on disposals of qualifying shares which can result in a tax saving of 10% for higher rate taxpayers (since the headline CGT rate is 20%).

In order for a disposal to qualify for Investors’ Relief, the shares being disposed of must satisfy the following conditions:

• Be newly issued, having been subscribed for by the person(s) making the disposal,
• Be in an unlisted trading company, or in the holding company of a trading group,
• Be issued by the company on, or after, 17 March 2016 and have been held for a period of 3 years from 6 April 2016,
• Have been held continually for a period of 3 years before disposal,
• Have been held by an unconnected person(s), i.e. not an officer or employee of the company.

Unlike Entrepreneurs' Relief, there is no requirement to hold 5% of the ordinary share capital and have 5% of the voting rights in the company and so Investors’ Relief is even more accessible. The relief is subject to a lifetime cap of £10 million of chargeable gains per individual which HMRC have stated will also apply to beneficiaries of trusts and is in addition to the current £10 million cap on Entrepreneurs' Relief.

Example

Sarah is a higher rate taxpayer and wishes to sell 100 shares for a total of £1,000,000. The shares were originally purchased for £400,000 creating a capital gain of £600,000.

If the shares do not satisfy the conditions for Investors’ Relief then the gain will be subject to 20% capital gains tax meaning that Sarah will be due to pay £120,000 in tax.

If, however, the shares do satisfy the conditions outlined above then Investors’ Relief may be claimed and a 10% rate of tax applied. This would create a tax saving of £60,000.

This is a useful addition to the tax code to encourage individuals to invest in UK businesses, and compliments other investor tax reliefs such as EIS / Seed EIS and VCT.

If you would like more information on Entrepreneurs' relief or Investors’ Relief, or would like to discuss your tax affairs in general, please contact us.