That’s a relief (for investors)

Equity investment in unquoted companies, be that from friends, family or business angels, is an important component of a successful economy and sustainable economic growth. It has been regularly cited as such by the Chancellor in his objective of creating a strong enterprise and investment culture.

In many cases, an investor can obtain rather favourable tax treatment on his/her investment if it qualifies for relief under the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS).  Such tax reliefs can deliver an immediate income tax deduction and, where the shares are held for at least three years post investment and continue to qualify, an exemption from Capital Gains Tax on a future disposal.

Unfortunately, the conditions required under both EIS and SEIS are particularly stringent and, in many cases, just not possible to meet – be that by the investor (who may wish to acquire shares with preferential rights) or the company into which he/she is investing in (as it does not undertake a qualifying trade). 

Such restrictive conditions will represent a barrier to investment if the availability of tax relief is a pre-requisite of the investment decision.  The lack of tax relief can be further emphasised where the investor does not then satisfy the shareholding and employment conditions required to qualify for Entrepreneurs’ Relief, which would reduce the rate of capital gains tax payable on any future capital gain made to 10%. 

In recognition of this perceived barrier and the impact that this could have on access to capital by unlisted companies and therefore future economic growth, the Chancellor has introduced legislation to extend the availability of the favourable tax rate given under Entrepreneurs’ Relief to investors who would not otherwise qualify via the introduction of “Investors’ Relief”. 

Under the proposed legislation included in the Finance Bill 2016, for those investors who:

a) subscribe for new ordinary shares in an unlisted trading company (or unlisted holding company of a trading group) on or after 17 March 2016, that are:

  1. fully paid-up in cash;
  2. issued under a bargain at arms length; and
  3. subscribed for genuine commercial reasons.

b) hold such shares for a minimum period of three years prior to disposal (such three year period commences on 6 April 2016 for shares subscribed for between 17 March 2016 and 5 April 2016);

and

c) who have had no connection with the investee company prior to the subscription (i.e. neither being an employee or a director or related to an employee or director) or will not have any such connection whilst as a shareholder. 

Any capital gain made on a future sale will qualify for Investors’ Relief and a 10% tax rate.  Importantly, the lifetime limit for Investors’ Relief is set at £10 million.  This is in addition to the £10 million lifetime limit permitted under Entrepreneurs’ Relief and may therefore make this new relief attractive to those investors who have already reached the cap under Entrepreneurs’ Relief.

This is a welcome new piece of legislation and should be good news for local companies looking for equity investment who may not meet the conditions required under EIS (or SEIS).  However, as a word of caution, as with all tax reliefs, the new Investors’ Relief contains some counter-avoidance measures and tax advice should be sought.

For Further information concerning Investors' Relief and how PEM can assist you, please contact Matthew Eady. 

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Matthew Eady

Director of Share Schemes and Reward
​I am a Director in the Employment Taxes department. A lot of my time is spent advising companies on employee share incentive and reward arrangements; implementing share schemes and agreeing share valuations with HMRC. I also advise clients on employment tax matters generally, employment status queries and get quite involved in the P11D and Share Scheme Annual Return process.

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