Although it seems a world away, back in March 2020 the Spring Budget saw the restriction (and renaming) of Entrepreneurs’ Relief. Now known as Business Asset Disposal Relief – or inevitably “BADR” – the 10% rate of capital gains tax is only applicable to the first £1 million of lifetime disposals made by business owners (down from the £10 million limit before the Budget).
While BADR still remains available to qualifying business owners, other tax reliefs may become more popular amongst investors now that it has become less valuable than before. This article looks at Investors’ Relief, (Seed) Enterprise Investment Scheme, and other tax reliefs that may be of interest to investors and shareholders.
First up is Investors’ Relief. First introduced in 2016, this relief will likely look familiar to those who are already acquainted with BADR.
Like BADR, where relevant conditions are met, Investors’ Relief offers a 10% capital gains tax rate to investors on the sale of their shares in an unlisted, trading company. Unchanged by the March Budget, this 10% rate applies to the first £10 million of qualifying lifetime gains made by an investor.
However, Investors’ Relief differs from BADR in some key areas. There is no minimum shareholding, and there is a three-year holding period. The shares must also have been held by the investor from the date they were issued in order to qualify for the relief.
Most notably, to qualify for investors’ relief, the investor – or any person connected to them – cannot be a ‘relevant employee’ of the company in which they hold their shares. This is a key difference to BADR where being an employee is necessary.
It is worth noting that a ‘relevant employee’ would generally not include an ‘unremunerated director’, and so in some cases the investor may be permitted to sit on the board of the company.
Investors’ Relief will be appealing to those individuals are looking to invest in an unrelated company and perhaps offer their expertise as an unpaid board member.
Enterprise Investment Scheme (commonly known as “EIS”) and its sister relief the Seed Enterprise Investment Scheme (SEIS) will continue to be attractive to investors.
These reliefs are targeted at individuals investing into smaller and start-up companies who fall below certain size thresholds, and provide both income tax and capital gains tax relief.
EIS, designed for investors in companies with assets up to £15 million, and up to 250 (or in some cases 500) employees, provides tax relief on investments of up to £2 million per year, including income tax relief, exemptions from capital gains and capital gains tax deferral opportunities.
SEIS, geared more toward start-ups, applies to companies with less than £200,000 of gross assets and fewer than 25 employees. Investors in such companies can secure income tax relief, and an exemption other capital gains which are reinvested into SEIS companies on an investment of up to a maximum of £100,000 per year.
A number of other conditions must be met before an investment can qualify for these tax reliefs, however they remain an option available to investors looking to structure their investments tax efficiently.
We have also seen a growing interest amongst shareholders of private businesses for employee ownership trusts (EOT)s, which in can see shareholders realise gains at a 0 percent rate of tax. Bringing about their own complexities, we will cover EOTs in more detail in a future “personal perspectives” article.