Investors’ Relief: the forgotten million-pound opportunity?
For Consilium’s latest insight, Craig Coyle looks at the frequently overlooked Investor’s Relief and the tax benefits it can offer to investors.
Investors and entrepreneurs have varying degrees of familiarity with tax legislation (and for differing reasons!) but everyone used to be aware of Entrepreneurs’ Relief. Until March 2020, Entrepreneurs’ Relief meant you could pay Capital Gains tax of 10% on the first £10m of gains from certain business sales, thus saving up to £1m of tax.
Entrepreneurs’ Relief was subsequently replaced by Business Asset Disposal Relief (BADR) which was limited to only the first £1m of gains, saving up to £100,000 of tax. This measure was very unpopular with shareholders in owner-managed businesses given that it increased the tax payable on, for example, a £5m disposal from £500,000 to £900,000.
Whilst BADR remains valuable, there is another tax relief which continues to offer £10m of gains at 10% but is rarely discussed; Investors’ Relief (IR).
What is Investors’ Relief?
IR was introduced in March 2016 and only applies to the first £10m of gains on qualifying shareholdings. Those gains are then only taxed at 10% rather than the current prevailing rate of 20%, therefore potentially saving £1m. Of course, you need to find an investment which gains in value by £10m to fully utilise IR and if I had any advice on how to do that, I would not be earning my keep writing about tax legislation.
How does Investors’ Relief work?
Aside from the small matter of finding a rocket ship of an investment, there are some limitations on what gains qualify for IR. As you might expect, they are more restrictive than those applying to BADR.
Investors’ Relief limitations include:
• The relief only applies to disposals of ordinary shares in unlisted trading companies or of the holding company of a trading group (same as for BADR)
• The shares must be subscribed for (i.e. new shares) in cash rather than shares acquired from an existing shareholder
• Neither the investor nor anyone connected with them can be a director or employee of the company. Connected broadly means spouse, siblings, (grand)children and (grand)parents, as well as partners in a business partnership. Please note that detailed advice should always be taken on this point
• The shares need to be held for 3 years
• The £10m lifetime limit is separate from the Entrepreneurs’ Relief/BADR limit
• There is no minimum shareholding size.
Investors’ Relief: tax savings in the right circumstances
The rules are to some extent a hybrid of the BADR rules and the rules around the Enterprise Investment Scheme (EIS). There are more generous tax reliefs around EIS investments, but the companies which can be invested in are more limited and potentially higher risk.
Investors’ Relief is often forgotten when it comes to structuring investments. As demonstrated earlier, it can offer significant tax savings in the right circumstances. Where an individual has the cash to invest in a trading company, they should certainly consider whether they can structure their affairs in a way which could qualify for Investors’ Relief
The team and I at Consilium Chartered Accountants would be happy to discuss Investors’ Relief in more detail with business owners or investors with any queries. With expert advice and tax planning, it might be possible to structure a new investment in such a way as to take advantage of the 10% rate offered by IR.
Expert tax advice and planning for entrepreneurs and investors
Consilium Chartered Accountants offer a comprehensive range of tax planning and advice to businesses and individuals. Combined with our extensive experience in business planning, financial modelling and exit planning, it is no surprise that we are a trusted advisor to business owners and entrepreneurs in Scotland.
To arrange a confidential virtual or in-person meeting to discuss Investors’ Relief or how we could help you better structure your tax affairs, contact Craig Coyle.