December 14, 2016
John Kingsley is a man on a mission to explain why we’ve now got two very similar Capital Gains Tax reliefs: the more familiar Entrepreneurs’ Relief and the newbie, Investors’ Relief…
We’ve got George Osborne to thank for the introduction of Investors’ Relief, which has been described as an extension of its close relative, Entrepreneurs’ Relief. In fact Investors’ Relief is a separate statutory relief with its own specific conditions and, inevitably, its own quirks. Before we consider any of the underlying detail, let’s take a step back and put these outwardly very similar reliefs into their commercial context in order to understand them better.
Readers will be aware that Entrepreneurs’ Relief opens the door to enjoying a 10% CGT rate on the disposal of qualifying assets, shares in a trading company being the prime example. Of course lower tax rates come with strings attached and the Entrepreneurs’ Relief regime normally requires the seller to own at least 5% of the company’s ordinary share capital, as well as being an “Officer” or employee of the company in question (there are some notable exceptions to the general rules, which we won’t go into here). As a result, Entrepreneurs’ Relief is squarely targeted at working shareholders of SMEs, who are regarded as the driving force behind an entrepreneurial business culture.
Investors’ Relief, on the other hand, has been pitched squarely at external investors, who must subscribe for ordinary shares in cash and hold them for a minimum term of 3 years to enjoy the benefit of a 10% CGT rate on gains of up to £10M (realised on or after 6 April 2019) . The Chancellor’s stated rationale for the introduction of this new regime is to encourage long-term third party investment in unquoted trading companies, presumably with the aim of plugging a perceived funding gap in the SME space. Only time will tell whether that well intentioned objective has been achieved.
Having said that, some important changes were made to the Investors’ Relief framework during the legislative process in response to concerns that external investors would not be willing to risk substantial sums of their own money unless they had some meaningful safeguards. As a result, it’s possible for the investor to take a seat on the company’s Board as an “unpaid Director” and, perhaps more surprisingly, the investor can become an employee of the company 180 days after the original share issue. Both these relaxations come with numerous caveats. It’s also worth saying that the investor must not have any other connection with the investee company, the stated policy objective being the encouragement of arm’s length investment.
Viewed in the round, the fundamental differences between these two outwardly very similar CGT reliefs are the absence of the “5% share ownership” requirement and the inclusion of broadly based “not connected”/”no returns of value” conditions (with the let outs mentioned above) under the new Investors’ Relief regime.
As a final thought, some tax commentators have asked whether an unpaid Director with a shareholding of at least 5% could potentially claim both Investors’ Relief and Entrepreneurs’ Relief in respect of the same transaction, thereby sheltering up to £20M of capital gains. No doubt there will be “clarification” of this point in the not too distant future.