Investors' relief ("IR") can save an individual investor up to £1 million by reducing the rate of capital gains tax ("CGT") payable by on sales of their qualifying shares from 20% to 10%.
IR combines some of the characteristics of business asset disposal relief ("BADR", known until 2020 as entrepreneurs' relief, "ER") and Enterprise Investment Scheme relief ("EIS").
Although introduced in 2016, IR remains relatively little used: the conditions that apply to IR may encourage many investors to seek EIS instead where it is available as EIS can provide a full exemption from CGT on disposal and other tax benefits, but IR can be particularly useful in situations where neither BADR nor EIS are available.
Unlike EIS, IR does not require the company to conduct a "qualifying trade", so IR can apply to activities that are excluded from EIS, including property dealers and developers, farming, forestry, hotels, and care homes.
Investors' Relief vs BADR
There is some overlap between IR and BADR, however there are some notable differences.
IR is for investors who are not actively involved in the business in which they are disposing shares. BADR is available, however, only when in the preceding 24 months the individual was an employee or officer of the relevant company or a member of its group.
IR and BADR both only apply to investment in trading companies and where the investment is in unlisted shares. Both are subject to a lifetime cap on the amount of relief an individual can receive, however IR has a notable advantage over BADR. The lifetime limit of ER/BADR relief decreased in the 2020 Budget to £1 million in gains whereas IR retains its £10 million lifetime limit.
- The original investment must have been made on or after 17th March 2016,.with a new issue of ordinary shares subscribed for and fully paid up in cash.
- The shares must have been held for at least three years from 6th April 2016.
- The shares must have been disposed by the original investor on or after 6th April 2019.
- The company in which the shares were held must be a trading company (and not listed on a recognised stock exchange) or holding company of a trading group throughout the shareholding period.
- Neither the shareholder, nor anyone connected to them, can be an officer or employee of the company at any time during which they held the shares.
- An investor cannot receive value from the company in respect of their shareholding (dividends are allowed).
It is important to note that there is no minimum shareholding requirement to qualify for IR.
Making a claim
To claim IR, an application must be made to HMRC in writing by the first anniversary of 31 January following the end of the tax year in which the qualifying disposal took place. Typically the claim is made in an individual's self assessment tax return.
Use of IR
IR has not been widely claimed to date but is an extremely valuable tax relief. HMRC statistics show that fewer than 1000 individuals claimed IR in the tax year 2019/20.
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