Many individual business owners are aware that a capital gains tax (CGT) rate of only 10% can apply if business asset disposal relief (BADR) (previously known as entrepreneurs’ relief (ER)) is available on qualifying business disposals, up to a lifetime limit.
A major ‘headline grabber’ was the Chancellor’s announcement in the March 2020 Budget that the ER lifetime limit was reducing from £10 million to £1 million for disposals from 11 March 2020.
The ‘other’ relief for investors
However, a less well-known relief, investors’ relief (IR), can be claimed for a reduced CGT rate of 10% on lifetime gains of up to £10 million, if the relief conditions are satisfied. IR applies to disposals of certain shares in a trading company by individuals (or trustees in some instances).
Detailed commentary on the IR rules is beyond the scope of this article, but some of the main conditions are outlined below (all references are to TCGA 1992).
Subscribing for shares
The qualifying unlisted shares must (among other things) have been ‘subscribed for’ (as defined) by the person making the disposal, and been issued on or after 17 March 2016 (ss 169VB(2), 169VU).
Holding the shares
The shares must be held for at least three years between the shares being issued and the disposal (s 169VB(2)(h)). Special rules can apply to company reorganisations, which are beyond the scope of this article.
Working for the company
As a general rule, the investor (or a connected person) cannot be a relevant employee of the company at any time in the ‘share-holding period’ (i.e. broadly the period between the acquisition and disposal of the shares) (s 169VB(2)(g); separate rules apply to trustees).
A ‘relevant employee’ is broadly someone who has been an officer or employee of the issuing company (or connected company) at any time in the ‘relevant period’ (i.e. the share-holding period).
However, there are two exceptions to this general rule:
- An ‘unremunerated director’ (as defined) of the issuing company (or a connected company), where they (or a connected person) prior to the relevant period have not been connected with the issuing company or involved in carrying on the whole or any part of the trade, business or profession carried on by the issuing company (or connected company);
- If someone becomes an employee (not a director) of the issuing company (or a connected company) more than 180 days after the commencement of the relevant period where, at the beginning of the relevant period, there was no reasonable prospect that the person would become an employee (s 169VW).
Don’t lose it!
If an investor subscribes for shares eligible for IR but receives ‘value’ as defined (other than insignificant value) from the company within a ‘period of restriction’ (i.e. one year before to three years after the shares are issued), the shares are generally treated as being excluded (Sch 7ZB).
The IR rules are complex; the above is only a selection of important ones. IR and BADR are separate and distinct reliefs, each with their own set of rules. The same taxpayer can therefore enjoy a £1 million lifetime limit for BADR purposes and a £10 million IR lifetime limit.
The above article was first published in Tax Insider (September 2020) (www.taxinsider.co.uk).