A new tax-saving opportunity for Investors

A new capital gains tax break is designed to encourage investment in small companies. It fills the gap between enterprise investment schemes and entrepreneurs’ relief (ER). How and when can you take advantage of it? Investors’ relief In his Budget 2016 the Chancellor made some big changes to capital gains tax (CGT). One of these was a new incentive referred to as “investors’ relief” (IR). Subject to conditions, it offers investors a 10% rate of CGT on gains they make in respect of money they put into businesses. In 2016/17 that rate is only available on gains to which entrepreneurs’ relief (ER) applies and to individuals whose total taxable income plus gains aren’t greater than the basic rate band.Conditions To qualify for IR your investment must be in ordinary shares of an unlisted company that trades, i.e. doesn’t exist wholly or mainly for the purpose of holding investments. However, unlike ER, you don’t need to own 5% or more of the company’s ordinary share capital. Another difference is that with IR you must not be an employee or officer of the company, i.e. a director or company secretary.

Trap 1. Anti-avoidance rules say that the shares must be new, issued to you by the company. So IR won’t apply if you swap old shares for new ones unless you pay more for them.

Trap 2. IR isn’t allowed if you or anyone connected with you is an employee of the company you’ve invested in at any time during the period of share ownership. For example, if your son takes a job as an employee with the company. In that situation IR is lost for good even if the three-year qualifying period of share ownership has passed by the time your son starts the job.

Example. In July 2016 Brian buys 20% of the shares in a friend’s company. He has no other involvement with it. In September 2019 he sells the shares and makes a gain of £100,000. He claims ER, but is refused by HMRC because he wasn’t an employee or officer of the company for the twelve months ending in the sale of the shares. The good news is that Brian qualifies for the 10% CGT rate on the whole £100,000 gain. All he need do is submit a claim for IR by 31 January 2021.Timing IR can only apply to shares issued on or after 17 March 2016 and you must own them for at least three years from the date you bought them or 6 April 2016, whichever is later. The earliest date IR can apply is therefore 6 April 2019.A generous maximum relief During your lifetime you can claim IR on up to £10 million of qualifying gains. This ought to be enough for most people. The IR limit does not affect the separate £10 million maximum for ER, and vice versa.
Tip. IR can apply to gains you make from selling shares for which you’ve claimed income tax relief under the enterprise investment scheme (EIS) rules.Other tax investment schemes If ER doesn’t apply to a gain or if you can’t claim EIS or seed enterprise investment scheme relief, say, because you were a director before you bought the shares, IR provides an alternative, albeit sometimes less generous, CGT relief.

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