Investor Relief – the new incentive to encourage SME growth

Investor Relief – the new incentive to encourage SME growth

With Finance Bill 2016 came the announcement of Investor Relief; a new Capital Gains Tax (CGT) relief which forms part of the Government’s aim of driving investment in business to support their growth.

Where qualifying conditions are met, Investor Relief provides a reduced CGT rate of 10%.

Although Investor Relief was announced as an extension to Entrepreneurs’ Relief (ER), it is a separate relief that will sit alongside the other entrepreneurial reliefs available such as ER, Enterprise Investment Scheme (EIS) and employee shares.

Key points of the new Investor Relief:

• Shares acquired must be newly issued subscriber shares;
• The shareholder must not be connected to the company (either an employeedirector or family);
• There is a shareholder limit of £10 million of qualifying gains (separate from ERs £10 million limit);
• Shares must be acquired on or after 18 March 2016;
• Shares must be held continuously for three years prior to disposal;
• There is no minimum shareholding requirement (unlike ER);
• The company must be an unlisted trading company (therefore includes AIM shares).

The salient difference with ER is the definition of a ‘trading company’ which is wider for Investor Relief and includes asset backed trades, such as shipping, property development, hotel and farming companies. In addition, there is no minimum shareholding requirement and the shareholder must not be connected with the company.

Comparison with the Enterprise Investment Scheme (EIS)

EIS provides a 30% income tax relief on the amount of investment made and gains on disposal of EIS shares held for three years are exempt from CGT. On the other hand, Investor Relief provides a low, 10%, CGT rate.

So why consider Investor Relief if it’s not as tax efficient?

EIS is considered ‘state aid’ by the EU and as such is closely monitored by EU regulation. This means that the qualifying company criteria for EIS relief is very tight and significantly more so than for Investor Relief. As EIS regulation has become more complex over the years since its introduction, SMEs may not have sufficient resources to seek the appropriate advice to ensure EIS conditions are met and appropriate HMRC applications are made.

As far as we believe, what will make Investor Relief an important relief for private investors is the fact that the aforementioned asset-backed businesses, which are specifically excluded from EIS reliefs, will qualify for the new Investor Relief.

If you have any questions regarding this new relief and the impact it may have on your business, please do not hesitate to get in touch with Roger Campbell.

T: 0141 567 4500