Investors’ Relief was introduced by George Osborne in the March 2016 Budget as part of the Government’s continued focus on encouraging patient capital investments. The introduction of the relief was completely unexpected and therefore attracted considerable attention at the time.

Regarded by many tax advisers as the investors’ equivalent of Entrepreneurs’ Relief, it has largely remained in the shadow of its little cousin, the Enterprise Investment Scheme (EIS) Relief, due to the more generous tax reliefs offered by the latter. But Investors’ Relief holds a number of advantages that make it an important relief to consider when investing in a company.  

What is Investors’ Relief?

The Government’s intention behind introducing the relief was to encourage private investment in trading companies which had become too large to qualify for EIS relief. Subject to meeting certain conditions (outlined below), Investors’ Relief enables a qualifying investor to benefit from a 10% rate of capital gains tax (CGT) on up to £10 million of qualifying investments – thus offering a lifetime CGT saving of up to £1 million.

What are the conditions?

Firstly, Investors’ Relief is only available for qualifying investments made on or after 17 March 2016 – i.e. investments made before this date will not qualify. The qualifying conditions can broadly be split into three areas, all of which need satisfied for a period of at least three years from the date of the original investment to the date of disposal. Please note if the holding period of the shares exceeds three years, the conditions set out below must be met throughout, otherwise the shares will not qualify for the relief.

Investor conditions

• The investor or, a connected person (e.g. spouse, child parent), cannot be an employee or a director of the company.
• There is an “Business Angel” exception for unpaid directors who were not a director prior to subscribing for the shares, and a further exception for an investor who becomes an employee more than 180 days after acquiring the shares and this was not actively contemplated at the time of acquisition.
• The investor does not receive any value from the company – e.g. receives a benefit or repayment of loan to the company.

Share conditions:

• The shares must be ordinary shares, newly issued and fully subscribed for in cash by the investor.
• The shares must not be listed on a recognised stock exchange (doesn’t include AIM), at the date of issue.

Company condition:

• The Company is a trading company or holding company of a trading group – i.e. it does not have any significant investment activities.

It has only been possible to make qualifying disposals since 6 April 2019.  As such information on the value of claims made is not yet available from HMRC given that claims will first be made on 2019/20 tax returns.

What should I do?

Investors should complete a review of their investments in private trading companies made on or after 16 March 2016 in order to identify if they have investments which might qualify. Upon identifying investments which might qualify, such investments should be discussed with your investment and/or tax adviser in order to determine if all qualifying criteria could be satisfied for a future disposal.

Furthermore, if you are considering making an investment which might qualify, advice should also be sought to ensure actions aren’t taken which could prevent you qualifying.

Other factors to consider

Given that many political parties are proposing to review or completely withdraw Entrepreneurs’ Relief, it is possible Investors’ Relief could be withdrawn also.  Therefore, companies which are already going through a sale process may wish to look to accelerate completion of the sale (subject to commercial rationale) in order to enable qualifying directors / employees to benefit from Entrepreneurs’ Relief and qualifying investors to benefit from Investors’ Relief.

Get in touch

If you have any questions about this relief or any other reliefs mentioned in this article please do not hesitate to get in touch with me.