Way back in the spring of 2016, the world was a very different place. The referendum was looming but Brexit seemed unlikely. Leicester City were miraculously Premier League champions-elect. COVID had not entered the lexicon. And most importantly of all, Entrepreneurs’ Relief (“ER”) provided a 10% rate of Capital Gains Tax (“CGT”) for company shareholders on a sale of their trading businesses up to a maximum of £10m.
In the Spring Budget of 2016, then-Chancellor George Osbourne announced the introduction of a new CGT relief, known as Investors’ Relief, which would essentially be an extension to ER.
In the months and years that followed, the UK left the EU (eventually). Leicester City won the Premier League and FA Cup, were relegated, and then promoted. The world closed down and reopened. And ER was renamed and decimated, with the lifetime allowance reduced to £1m and the qualifying conditions tightened.
Investors’ Relief, however, remains stoically unchanged since March 2016, and for the most part, bafflingly undiscussed and ignored in the general tax discourse, and very sparsely claimed by taxpayers. So what is it, what is the point of it, and who can benefit from it?
A brief history of Investors’ Relief
Investors’ Relief was introduced to build on other venture capital tax reliefs and encourage investment from wealthy individuals into private trading businesses. It is a CGT relief under which capital gains are charged at 10% (instead of 20%) on up to £10m of lifetime qualifying gains. This is in addition to the ER (now “BADR”, or Business Asset Disposal Relief) entitlement.
At current rates, Investors’ Relief permits a potential lifetime tax saving of up to £1m. It is therefore a potentially very valuable relief, particularly when compared to BADR, the benefit of which was reduced from a maximum of £1m to a maximum of £100,000 when the lifetime limit was reduced in 2020.
Whereas BADR is available to individuals selling shares in a company in which (amongst other things) they are a director or employee, Investors’ Relief is aimed at passive investors. To qualify, the investor must not be an employee of the company in which the shares are held (subject to some exceptions). Furthermore, the shares must be held for at least three years prior to a sale, and must be in unquoted trading companies. Finally, it’s important to note that only shares which are newly subscribed for qualify for the relief, as opposed to pre-existing shares which are acquired from current shareholder.
Statistics suggest that there is very little uptake of Investors’ Relief, and it has been claimed by a tiny proportion of the population. This might be attributed to the fact that it is generally likely to be applicable to a small minority of taxpayers, but it is also likely to be in part due to a lack of awareness of the relief.
Who is most likely to benefit from the relief?
As explained above, the relief is available to third-party or ‘passive’ investors i.e. those not actively involved as directors or employees, in unquoted trading companies. It is therefore not available to the majority of investors, who more typically put their money into the stock market or into real estate.
However, the relief should be available, subject to qualifying conditions being met, to investors in companies which had initially sought EIS or SEIS status but have ceased to qualify for CGT-exempt EIS treatment, and in respect of private equity investments made by individuals. In some cases, private equity fund managers might also be able to benefit, though care would be needed in respect of their connection to the underlying trading company and the extent to which they are remunerated for director services. At Claritas, we work with a number of private equity firms and professionals and have been surprised at the lack of awareness of Investors’ Relief and how the fund managers and their clients might be able to benefit.
Finally, the relief might also be of interest to high-net worth individuals who are looking to deploy a diversified and higher-risk investment strategy than simply investing in the stock market. Please note that this is not investment advice, and we would recommend professional investment advice is sought prior to investing.
What next?
The availability of Investors’ Relief should be considered on an ongoing basis for individuals who fall in any of the categories mentioned above, for as long as it still exists. There have been some suggestions that the relief should be abolished due to lack of uptake, though it does not seem to be the top priority to the new Labour government. We could see the retirement of the evergreen Jamie Vardy, the 10th anniversary of the Brexit referendum, or (God forbid) another pandemic before that happens. The relief might even become more valuable in the future should the main rate of CGT increase in the coming years.
Finally, we would also note that all is not lost if a capital gain has been reported through self-assessment and Investors’ Relief has not been claimed. It is generally possible to make a claim for an overpayment of tax up to four years from the end of the tax year in question, so Investors’ Relief could be retroactively claimed for an earlier period even though the filing and amendment deadline for that tax year may have passed.
If you would like to know more, please get in touch with your Claritas contact.
