Despite the myths, not everything in business is driven by tax efficiency. As a business angel or potential investor there may be several different reasons for wanting to get involved at some level in a company and tax relief isn’t always high on the list. Instead it may be that you have an interest in a specific industry, want to share knowledge or expertise that you have gained in your own working life, wish to help out a friend or family member or are simply looking for a return on surplus cash. H owever, as any good adviser should remind you, tax advantages shouldn’t be ignored as these can make an investment in the right business even more attractive and less risky. Conditions As with most things tax related, there are a number of conditions that have to be met before relief can be claimed: • The shares must be ordinary shares, newly issued and paid for in cash at the time of issue. This means that they cannot be existing shares purchased from an existing shareholder. • The company must be unlisted (this Who could use the relief? This relief would be useful for investors that may already have used up their £10m lifetime limit under Entrepreneurs’ Relief as it provides further CGT relief on the sale of shares. For an investor that meets the criteria for both reliefs this could mean gains of £20m being made over a lifetime with a tax bill of just £2,000,000. Careful planning would be needed particularly with regard to the length of time shares are held while other criteria are met.
Income tax reliefs such as through the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS) have been around for a while, along with Entrepreneurs’ Relief that can be applied to capital gains made. A couple of years ago, Her Majesty’s Revenue and Customs (HMRC) introduced another relief called Investors’ Relief to try and encourage entrepreneurial activity and investment in unquoted trading companies. This “new” relief is used less frequently than the others, but it can be attractive in the right circumstances and can also work with Entrepreneurs’ Relief if planned for carefully. How the relief works Investors’ Relief works by reducing the Capital Gains Tax (CGT) charged on the eventual sale of the shares. The gains made are taxed at a rate of 10% (instead of potentially 20%), with every individual having a lifetime gains limit of £10,000,000. It is similar to Entrepreneurs’ Relief but is aimed at external investors or business angels rather than directors or employees involved in the business.
includes shares listed on AIM) shares in a trading company or the holding company of a trading group throughout the entire time they are held. A company that carries on investment activity such as owning rental properties, owning shares in other companies or making loans would not qualify as trading unless these activities represented less than 20% of certain indicators (level of income, asset base, expenses and management time spent on the investment activities). • There is no minimum shareholding required but the shares must have been issued on or after 17 March 2016 and must have been held for 3 years from 6 April 2016 to qualify. • The investment must have been made for commercial reasons and not simply to avoid tax. • The investor or their family members must not have been an employee or officer of the company at any time after the shares were issued. However, the legislation was changed slightly after it was issued to make it more attractive to business angels so that directors who do not receive remuneration in the form of income or benefits can utilise the relief. A second exemption applies if the investor becomes an employee more than 180 days after the shares were issued and this was not contemplated at the time.
It may also be attractive to investors who have shares that qualified under EIS or SEIS but no longer do or who are interested in investing in companies that do not qualify for these schemes such as running a hotel or a nursing home, property development or farming activities. Companies that don’t want to apply to HMRC to qualify for EIS or SEIS could use this relief as a way of attracting investors. To invest or not invest? Obviously there are other things you should consider if you have surplus cash that you are thinking of investing in shares in a company, not least the level of risk that you are comfortable taking. This relief, and its interaction with the other measures available, could help you make your decision on whether to invest. It is important to get things set up correctly at the start in order that you can maximise your tax position in the future. Scrutton Bland have extensive experience working with investors to provide advice on the tax advantages of the numerous options which may be available. Furthermore we are able to bring our clients the professional expertise of our insurance, financial planning and accountancy teams in a joined-up approach which provides information and guidance without the need for lots of separate meetings. Contact Sarah Healey Pearce on 0330 058 6559 or sarah.healeypearce@ scruttonbland.co.uk
It does not give Income Tax relief in the same way as EIS or SEIS.
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