A new capital gains tax break for investors staking cash in unlisted companies is creeping in under the radar.
Investor Relief is a parting gift from former Chancellor George Osborne.
The relief, which extends entrepreneur relief for business owners, is part of the Finance Bill 2016 and as such, could be dropped or revised as the bill travels through Parliament.
With IR, the government is offering a 10% rate of capital gains tax to investors on a lifetime total of £10 million worth of investments in unlisted trading companies.
Investor Relief rules
Qualifying investments have to meet several restrictions –
- Shares must be new shares paid for in cash after March 17, 2016
- The investor or any connected person, such as a spouse, cannot be a director or employee of the company receiving the investment
- The company receiving the investment must be unlisted at the time shares are issued to the investor – including companies on London’s Alternative Investment Market (AIM)
- The receiving company must be trading or a holding company for a trading group for the entire time the shares are held
- The investor must hold the shares for a continuous period of at least three years to qualify for relief
One point of interest to investors is that IR places no limits on the size of an investment except the lifetime limit of £10 million.
In contrast, entrepreneur relief is set at a minimum 5% share of a business.
Lifting investment limits
The IR lifetime limit is also in addition to the £10 million lifetime limit for entrepreneur relief granted to employees.
To stop abuse of IR relief, any shares must be issued for a genuine commercial purpose and investors cannot take any money from a company except dividends without losing the relief.
IR is designed to encourage external investors to stake cash in a business without having to take a role as an officer or director of the company.
The relief also offers an extra tax break to investors who have already ploughed cash up to the limit each year into businesses under the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS).
No rules stop an investor putting cash into SEIS, EIS and IR each tax year.
SOURCE: Money International
