In his March 2016 Budget, the chancellor announced that entrepreneurs’ relief would be extended to long-term investors in unlisted companies; this measure is included in Finance Bill 2016 as a new separate ‘investors’ relief’. The benefit of this is that the rate of capital gains tax for disposals of qualifying shares is 10 per cent for lifetime gains of up to £10m.
There are a number of conditions that must be met to benefit from this new relief. Unlike entrepreneurs’ relief there is no minimum shareholding required, but the shares have to be held for at least three years. New ordinary shares issued to the investor for cash by an unlisted trading company or group after 16 March 2016 can qualify for relief, but acquisitions of existing shares will not qualify. Additionally, the share issue and subscription must be made for genuine commercial reasons at arm’s length, not forming part of tax avoidance arrangements.
Unlike entrepreneurs’ relief, neither the investor nor a connected person can be an officer or employee of the company, or a connected company, at any time in the period of ownership of the shares.
Significantly, investors’ relief is available in addition to entrepreneurs’ relief, so an individual could, in appropriate circumstances, pay capital gains tax at 10 per cent on up to £20m of gains.
Entrepreneurs’ relief changes
The Budget also amended entrepreneurs’ relief, particularly to modify changes made a year ago and which HMRC now accepts were too restrictive. We made representations to HMRC based on our clients’ circumstances, where we felt that genuine commercial arrangements were unfairly prejudiced. The amendments now made are backdated to last year’s Budget change in recognition of that unfairness.
Both the entrepreneurs’ relief and the new investors’ relief regimes are full of detailed technical rules, and advice should be sought at an early date to avoid falling into any of the technical traps that may deny relief. Otherwise, the standard capital gains tax rate, which is now 20 per cent for shares, will apply instead of the preferential 10 per cent rate.