Investors’ Relief – available from 6 April

Investors’ Relief has languished below the radar for the last 3 years, but 6 April 2019 is the date from which the earliest qualifying periods for holding shares which may be eligible for Investors’ Relief, come to an end.

Introduced by Finance Act 2016, Investors’ Relief is a CGT relief introduced to incentivise investors in unlisted trading companies and operates to allow investors to take advantage of a reduced 10% rate of CGT on qualifying disposals of shares up to a maximum lifetime limit of £10 million.

Unlike Entrepreneurs’ Relief, Investors’ Relief is aimed at external investors and excludes most shareholders who are employees or directors – with certain exemptions for directors who are ‘business angel’ type investors and are not remunerated.  Investors’ Relief also differs from Entrepreneurs’ Relief in that it has no minimum shareholding requirement and applies only to shares and not to other securities, such as debt or loans.

To qualify for Investors’ Relief, the relevant shares must have been issued on or after 17^th March 2016 and held for at least three years from 6^th April 2016.  The shares must be ordinary shares, subscribed for and fully paid in cash, at arm’s length for genuine commercial reasons.  They must also have been, at their date of issue, unlisted, which for this purpose includes shares in AIM-listed companies, (provided they do not have a secondary listing on another recognised exchange) and shares in companies which become listed after the date of issue.

Certain core requirements apply to the shares throughout the entire period of ownership, including a requirement that the shares must be in a company which is a trading company (or the holding company of a trading group) and a restriction on the investor receiving value from the company at any time during the holding period.

Investors’ Relief is likely to be most attractive to investors who have already used their lifetime Entrepreneurs’ Relief entitlement in full or whose shares initially qualified under EIS or SEIS but who have since become disqualified, as well as to companies wishing to attract investment but who are excluded from EIS or SEIS or have outgrown those reliefs.

Application of the relief is not straightforward and various exclusions and conditions need to be understood and applied and consideration given to the best way of maximising the tax savings available.  This may be particularly so where a disposal involves an earn-out or deferred consideration; where there is a reorganisation or share for share exchange, or where there are multiple share disposals, some or all of which may qualify for Investors’ Relief.  Investors should take care to avoid losing this potentially very valuable relief by inadvertently falling foul of the exclusions, for example, being in receipt of a small amount of remuneration as a director may put an investor outside the scope of the relief.  The relationship with other reliefs, such as SEIS, may also be relevant when deciding on what proportion of a gain, if any, to claim Investors’ Relief.

Claims for Investors’ Relief must be made on or before the first anniversary of 31^st January following the tax year of disposal – so the first eligible claims will need to be made by 31^st January 2023.  Although this date may seem a fair way off, the relevant holding period will in many cases already be running and investors would be well-advised to consider at an early opportunity whether they are eligible to claim Investors’ Relief and, if so, what they need to do (or not to do) to ensure this remains the case.