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Investor's relief

The Government has recently reduced the lifetime limit for entrepreneur’s relief from £10,000,000 to £1,000,000 but it has not done the same to investor’s relief, which still has a lifetime limit of £10,000,000.

As you are aware, Capital Gains Tax is currently anything between 10% and 28%.  If you are eligible for entrepreneur’s or investor’s relief, you pay a flat rate of 10%.

Investor’s relief is independent of entrepreneur’s relief, so you (in your capacity as an individual) can use both.

I have written a separate article dealing with entrepreneur’s relief, which has different qualifying conditions. In this article, I intend to focus on investor’s relief.

Investor’s relief was introduced to encourage individual investors to acquire shares in unlisted trading companies. A trading company is one that does not have substantial activities, apart from trading. The relief is also available, in certain circumstances, (which I have addressed later in the article) to trustees, where a beneficiary qualifies.

Not all shares that are traded on the stock exchange are treated as being listed.  You can find out what shares are listed in the designated recognised stock exchanges guide.

For investor’s relief there is no minimum shareholding requirement to qualify.  The qualifying conditions are as follows:

  1. Shares must not be listed on a recognised stock exchange at the date of issue.
  1. Shares must have been issued on or after 17 March 2015 and must be fully paid ordinary shares.
  1. Throughout the shareholding period the company issuing the shares must have been a trading company or holding company of a trading group.
  1. You, the investor must have held the shares continuously for at least three years from 6 April 2016, from the date of issue to the date of disposal.
  1. The shares must have been obtained for commercial purposes and not as a way of reducing tax. 
  1. You, (the investor),or anyone connected with you, must not have been an officer or an employee of the issuing company or any connected company. The only exception to this rule is if the employee/officer is an unremunerated director and has not previously been involved in the issuing company, or they became employees after the first 180 days of ownership, provided at the date of issue, there was no prospect of them becoming employees later.
  1. Another requirement is that, for the period from one year prior to the date of issue of the shares, ending three years after that date, the investor must not receive value from the company.  Receipt of value would include the company repurchasing from or repaying share capital to the investor, repaying a debt owed to the investor, waiving the investor’s liability to the company, providing any benefit to the investor which includes transferring assets to the investor and acquiring them back for more than their market value. Any of the above would disqualify the investor from claiming investor’s relief.  The investor is however, entitled to a dividend without losing the relief.

The tax relief has special share identification rules, which, for example, treat qualifying shares and excluded shares as disposed of before any potentially qualifying shares which have not been held for three years.

Share exchanges

In a share for share exchange (when one private company purchases another, resulting in no capital gain), one option to consider would be to elect to treat the share exchange as taxable so that Investor’s relief is available.

Under the Capital Gains Tax rules, if shares in one company are exchanged for shares in another company, the original shares may, subject to certain conditions, be treated as equivalent to the new holding of shares.  Where this treatment applies, the exchange does not count as a disposal of the original shares.  Any gain up to the date of exchange will be taxable only where the new holding of shares is disposed of.

The new shares issued to you in an exchange, will be treated, as being shares you subscribed for, for the purposes of investor’s relief.    However, it is possible they will not meet one or more of the conditions, for example, they may not be a trading company or you may be an existing employee of that company.  Also, the exchange rules apply where loan notes, rather than shares, are issued to you and these cannot qualify for investor’s relief.

To stop investor’s relief being lost on an exchange, you may elect that the normal rules about exchanges do not apply.  You will then be treated as disposing of the shares in your personal company at the time of the exchange and investor’s relief may then be claimed.  The election must cover all of the shares. 

Trustees of settlements and disposal of shares which qualify for relief

Investor’s relief may be available to trustees of settlements who dispose of shares by reference to the £10,000,000 lifetime allowance of a beneficiary that has had an interest in possession in the settled property that included those shares for at least three years up to the time of their disposal.  The beneficiary must not be an employee of the company and must elect to be treated as an eligible beneficiary.

If there are any other beneficiaries of the trust who have an interest in possession, only part of the gain would qualify for relief on a proportionate amount relating to the beneficiaries’ interest in the income of the trust.

Where there is more than one eligible beneficiary, their interests in the income are aggregated to calculate how much relief is due. 

Claims by trustees must be made jointly with the eligible beneficiary and will reduce the lifetime allowance of the eligible beneficiary. The relief is not available in relation to a trust where the entire trust is a discretionary settlement. 

Personal representatives of a deceased person can claim if the disposal took place whilst the deceased person was alive.

In summary, investors relief is a very useful tax saving tool to have in your armoury.

Wellers Wealth are very happy to work in conjunction with your independent financial adviser, accountant or legal adviser.

Please call us on 020 7481 2422 or email us at if you would like to know more.

This article was written by Ingrid McCleave and the law is correct as at 24th November 2020. Please note that tax legislation changes frequently, so this article should not be relied upon without seeking further legal advice.

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