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Investors’ relief – potential savings for investors

The new investors’ relief (“IR”) announced in the 2016 Budget allows investors to enjoy a lower rate of tax at 10% on lifetime gains of up to £10m on investments in shares in non-listed trading companies, which are issued after 16 March 2016 and held for at least three years before a disposal. This relief is in addition to entrepreneurs’ relief (“ER”).

Given the potential tax savings involved of up to £1m for each investor and the limited restrictions compared to other reliefs such as EIS, it is likely that IR will become very popular. However it should be noted that the Finance Bill is yet to be enacted (expected to be October) and changes could still be made.

How does this work?

To qualify for the relief, a number of conditions need to be satisfied:-

Conditions for the shares

There must be a new issue of shares, on or after 17 March 2016, and the consideration must consist wholly of cash.

Shares must be fully paid up, issued for genuine commercial reasons and not as part of a scheme or arrangement, the main purpose, or one of the main purposes of which, was the avoidance of tax.

The shares must be subscribed for, and issued, by way of a bargain at arm’s length.

Shares have to be ordinary shares, i.e. not fixed rate shares.

Conditions for the individual

During the holding period for the shares, the individual cannot be an officer or employee of the company or group and neither can anyone connected to the individual. Connection, for the purposes of the above test, consists of relatives, i.e. a spouse or civil partner, ancestor, direct lineal descendant or brother and sister. It also covers partners who are connected via a partnership. The individual has a lifetime limit of £10m of capital gains that can qualify for IR. This is in addition to the £10m lifetime ER limit that the individual may claim on other disposals.

The shares have to be held continuously by the individual for at least three years from the date of issue to the point of disposal, or until 6 April 2019 if the shares were issued after 16 March but before 6 April 2016.

There is no requirement (unlike ER) for an individual to hold a minimum percentage of the company’s shares.

Conditions for the investee company

The company’s shares cannot be listed on a recognised stock exchange at the point at which the shares are issued.

It must be a trading company or the holding company of a trading group throughout the holding period.

The definition of ‘recognised stock exchange’ means that shares issued by AIM companies can qualify for IR.

Value received

If the investor receives any value from the company in relation to the shares (other than an insignificant receipt being less than £1,000) this can result in the shares no longer qualifying for IR. Value received encompasses a wide variety of situations. It can cover the repayment of share capital or loans, other benefits or payments from or by the company and any transactions with the company not at arm’s length. The relevant period for receiving value is one year before the share issue, up until three years after the issue date.

Conclusion

The IR regime under which companies can raise funds is not as circumscribed as that applying to EIS investments, so a wider range of companies will qualify. In addition, there are no restrictions on the amounts raised nor are there restrictions on the size of business that can qualify. The relief is likely to prove of interest to many investors.

Further information

If you would like further information about how Clarke Willmott can assist you in understanding IR, please contact Niall Murphy in our Corporate team.