The Budget 2016 was generally positive for business owners and one change in particular; the extension to Entrepreneurs’ Relief (ER), offers additional tax advantages for business investors.
The government has said the new relief has been introduced because it wants to “create a strong enterprise and investment culture and ensure that companies can access the capital they need to expand and create jobs”.
In addition, “extending ER to external investors is intended to provide a financial incentive for individuals to invest in unlisted trading companies over the long term”. It is great news for investors who have previously been excluded from other tax reliefs like EIS and who have difficulties accessing ER.
EXTENSION TO ENTREPRENEURS’ RELIEF
Entrepreneurs Relief is only available to directors and employees, but the extension to entrepreneur’s relief, in the form of Investors’ Relief (IR), means that external long term business investors can now claim the same type of relief, albeit with different qualifying criteria.
In addition, individuals who invest in companies in which they are either directors or employees, but who are also internal investors in other companies, now have the opportunity to pay capital gains tax at the reduced rate of 10% on lifetime gains of up to £20million by claiming different reliefs on different investments.
Entrepreneurs relief has been in place since 2008 and is itself a very attractive relief; it allows qualifying business owners and company directors or employees to pay just 10% capital gains tax on the first £10million of qualifying lifetime gains.
The qualifying conditions are relatively few and relate to the final 12 months prior to disposal, when the company must be a trading company, the shareholder must be a director or employee, and must have a minimum 5% shareholding and voting rights, unless they acquired their shares through the enterprise management incentive share option scheme.
ELIGIBILITY CRITERIA FOR INVESTORS’ RELIEF
Investors’ Relief provides an extension for external investors to the 10% capital gains tax rate enjoyed by internal investors by providing that a further £10million of qualifying lifetime gains will be charged at 10% where the following qualifying conditions are met:
• The investment is in an unlisted trading company or holding company of a trading group;
• The shares are acquired by subscribing for newly issued ordinary shares which are issued on or after 17th March 2016;
• The shares are held for a minimum continuous period of 3 years from 6th April 2016;
• The investor is not an employee or officer (i.e. company secretary or director) of the company or another company in the same group;
An individual’s qualifying gains for investors’ relief will also be subject to a lifetime cap of £10million.
In summary, Entrepreneurs Relief is as attractive as Investors Relief; it is not as attractive as EIS but carries the same, more restrictive qualifying criteria, as EIS.
However, there is one overriding qualifying criteria for EIS which effectively means that many investors don’t qualify for the relief, and this is that investors must not, together with those connected with them, own more than 30% of the company’s share capital.
Investors Relief does not carry this restrictive condition and for this reason, it will fill a gap for many investors.