An introduction to Investors’ Relief

Ola Adeosun, Senior Wealth Planner

Changes to Business Asset Disposal Relief

The March 2020 budget saw a reduction in the lifetime allowance for Business Asset Disposal Relief (previously known as entrepreneurs’ relief) from £10 million to £1 million. BADR is a relief which enables entrepreneurs, partners and sole traders disposing of their business to benefit from a reduced rate of capital gains tax.

The relief is available subject to rather stringent rules, including the need to hold a minimum of 5% of the ordinary share capital of the company, and for the entrepreneur to be an officer or employee of the company for a minimum period of two years at the time of disposal of the shares. Where all the necessary conditions are met, a capital gains tax (CGT) rate of 10% will apply to the shares on disposal. So how will this impact investors?

What is Investors’ Relief?

Investors’ Relief is an alternative relief, which was introduced in 2016, for those individuals who are not as actively engaged with the affairs of the company invested in. Therefore, it represents a passive alternative to BADR, with a more generous lifetime allowance currently of £10 million.

Where it applies, qualifying capital gains will be subject to a reduced CGT rate of 10%. This applies up to a lifetime limit of £10 million.

The Relief applies to qualifying shares issued on or after 17 March 2016. 

The investor must meet certain conditions to benefit from the Relief, including:

• The investor’s subscription for the shares must be in cash.
• The investor must hold the shares from issue of the shares to the point of disposal.
• Generally, the investor must not be an officer or employee of the company or a connected company. This represents a significant difference to the rules that apply to BADR on share disposal.
• Another key difference in comparison to BADR is that there is no requirement to hold a minimum of 5% of the shares in the company.
• There is a requirement to hold the shares for a minimum period of three years. The one exception to this requirement is where the original subscriber transfers the shares to a spouse or civil partner, then the recipient is treated as being the original investor. This works in a similar way to the entitlement for a ‘no gain/no loss’ disposal for capital gains tax purposes between married couples and civil partners.
• The relief is available to individuals and, in some situations, can also be available to trustees.

In addition to the above conditions, the company has to be a trading company or the holding company of a trading group, when the shares are issued and throughout the qualifying shareholding period.

The shares must be ordinary shares on issue and disposal and not listed on a recognised stock exchange (AIM-listed shares can qualify provided there is no dual listing on a foreign recognised stock exchange).

A relatively unknown relief

The objective of Investors’ Relief is to extend the availability of reductions in the rate of CGT to investors in unquoted trading companies. Unlike BADR however, Investors’ Relief is still a relatively unknown relief amongst individuals who are actively investing in unquoted trading companies.  

Individuals who are looking at investment opportunities in unquoted trading companies should always explore whether or not they are likely to benefit from the relief by speaking to their accountant or tax adviser.

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