Tax benefits of investors relief

Whilst investments such as the Enterprise Investment Scheme and Seed Enterprise Investment Scheme are quite popular, investors relief is less well known.   It may prove useful where you fail to qualify for EIS or SEIS relief, or you're a non-director/employee shareholder who does not qualify for Entrepreneurs' Relief. We've therefore decided to cover the tax benefits of investors relief in this blog.

The tax benefits of investors relief

The relief is claimed by an individual on a later disposal which results in a capital gain. However it's really important to have a clear understanding of the rules before you make an investment to ensure you obtain the tax benefits of investors relief.

How much is the relief?

All capital gains that qualify for investors relief are taxed at 10% (even if you're a higher rate taxpayer) subject to a lifetime limit of £10 million.

Tax benefits of investors relief - qualifying shares and securities

The first point to make is that investors relief only applies to a disposal of investments in qualifying shares and securities.

A qualifying share is defined as an ordinary share which is subscribed for and issued in the following circumstances:

  • Fully paid up and wholly for cash
  • 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.
  • By way of a bargain at arm’s length
  • In a company that is unlisted on a recognised stock exchange at the time the shares are issued  - AIM listed shares potentially qualify.

If you subscribe for shares and then transfer these to your spouse or civil partner in your  lifetime while you are living together then they are treated as if they had been subscribed for by your spouse or civil partner.  This means that the period for which you've held the shares is added to their holding period.

What type of company must the shares be held in?

Shares must be shares issued by a trading company or holding company of a trading group as defined in the taxes legislation.

Trading activities could include activities carried on in preparing to trade or with a view to acquiring a trade or trading company. A company will be treated as continuing to trade after it enters administration, liquidation or receivership. However this is on the proviso this is not done for tax avoidance purposes. The company can't be listed on a recognised stock exchange at the time of the share issue, though AIM shares do qualify for relief.

Shares will fall into three categories:

  • A share that qualifies because it has been held for three years
  • A share that potentially qualifies as it has been held for less than three years
  • A non-qualifying share

Shares may become non-qualifying if any of the key conditions change or an event such as re-organisation. Shares may also be disqualified if you receive an excess return of value from the company (see below).

As mentioned above, shares are disqualified if you  (or an associate) receive value from the company (or a connected party) in the period beginning one year before share issue and three years after the share issue. 

For further details of what is regarded as a return of value which potentially disqualifies a shareholding see here.

Tax benefits of investors relief - other disqualifying events

You cannot be an officer or employee of that company, or of a company connected with that company at the time of subscription to the shares. However, after subscription, you can become a 'relevant employee' which is either:

  • An unpaid director of the company, or a connected company, who has never have been previously involved with the issuing company and has never previously received disqualifying payment
  • An investor who did not intend to become an employee at the time of subscription and becomes an employee 180 days after the shares are issued.

What happens on a re-organisations and take overs?

Special rules apply in these circumstances.

If there is a re-organisation of a company's share capital and no new consideration is given the new holding is treated as having the same proportions of qualifying, potentially qualifying and excluded shares as the original holding.

Where there is a share for share exchange or reconstruction the qualifying conditions need to be met:

  • For the original shares from their issue date until the re-organisation / reconstruction, and
  • For the new shares from the date of re-organisation / reconstruction to the disposal.

If following a share for share exchange your new holding does not qualify for investors relief, you can elect to treat this transaction as a disposal of your original shareholding.

This will crystallise a capital gain and any available tax relief at that point. By making the election you can ensure that investors relief is not lost if the original shareholding qualified for relief  and the new one doesn't

Tax benefits of investors relief - interaction with entrepreneurs' relief 

You may have a share disposal that qualifies for both entrepreneurs' relief and investor relief - both with lifetime limits of £10 million.  You therefore potentially have the choice of which relief to claim if both are available. 

Equally, if the gain exceeds £10 million, both reliefs should potentially be available on the same gain .

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at richard@tfaaccountants.co.uk.

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