In the 2016 Budget, we learned of the future introduction of a new tax relief designed to attract new share capital into unlisted companies. Investors’ Relief (IR) is an extension to Entrepreneurs’ Relief (ER) but it is a different group of people that will benefit from the scheme.
How Investors’ Relief differs from Entrepreneurs’ Relief
Both reliefs are similar in that they provide a 10% capital gains tax rate for shareholdings in trading companies. This is in contrast to the 20% tax rate for higher rate taxpayers. They also both have the same upper limit – up to £10 million of lifetime gains can be made and be taxed at the 10% rate.
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. By contrast, IR is designed for non-working investors. Late changes to the rules mean that IR may be allowed in some cases where an individual (or someone connected with an individual) is an ‘unpaid director’ or becomes an employee of the company.
Weighing up the options: EIS, SEIS, Investors’ Relief
Investors and companies seeking additional capital should look at Investors’ Relief as an alternative to the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).
At first glance, EIS and SEIS look better from the investor’s point of view. Both EIS and SEIS give income tax relief on the amount invested as well as complete tax exemption from capital gains. There is no tax relief on IR and is subject to capital gains tax of 10%.
It is the companies looking for investment who may find Investors’ Relief far more attractive. IR is subject to far fewer conditions and restrictions than the other two reliefs. To qualify for EIS and SEIS a company must tick all the right boxes in terms of the type of trade, company size, the amount raised, and how and when the monies are invested.
When to choose Investors’ Relief
Here are some examples of where IR may be attractive to the company and the investor:
- asset-backed trades which are excluded from EIS and SEIS e.g. farming, property development and hotels
- larger companies on the Alternative Investment Market. As they are not regarded as ‘listed’, these companies potentially qualify. Whilst some of these companies could qualify for EIS, but this is restricted to companies with gross assets of less than £15 million before a further share issue.
If you are looking for advice on raising funds for your business, or are interested in IR as an investor, contact one of our offices or enquire online.