• Investors’ Relief
    A new tax break for Business Angels

    By Satwaki Chanda


    Investors' relief is a new CGT relief introduced by Finance Act 2016, designed for people who invest in unquoted trading companies without being involved in the management or operation of the business. These people cannot qualify for entrepreneurs' relief on realising their investment, and so they wouldn't expect to benefit from the special 10% rate - until now.

    This is a tax relief which should be of particular interest to business angels. Although we already have other tax advantaged schemes, such as the venture capital schemes, they are too complicated and hedged with all sorts of rules and regulations. Investors' relief is far simpler and should prove an attractive alternative for investors.

    What are the basic rules?

    The relief applies to investments made on or after 17 March 2016. The following conditions must be satisfied1:

    • The investor must subscribe for ordinary shares in an unquoted trading company or holding company of a trading group;
    • The shares must be fully paid up at the time of the subscription and paid for wholly in cash;
    • The shares must be issued by way of a bargain at arm's length terms and for genuine commercial reasons (no tax avoidance motive);
    • The investor must hold the shares continuously for a three year period. However, for shares issued before 6 April 2016, the holding period is extended to 6 April 20192;
    • The company must satisfy the trading requirements throughout the period for which the shares are held;
    • Subject to certain exceptions, the investor must not be an officer or employee of the company itself or of any other company connected to the investee company. This restriction applies throughout the period for which the investor holds the shares and also extends to any person connected with the investor.

    Provided that a claim is made, capital gains on the shares are taxed at the 10% rate3. So, just as with entrepreneurs' relief, the 10% rate is not automatic - it must be claimed4.

    The last two conditions need to be treated with caution. It is tempting to focus on the three year period as the hurdle that must be endured, and that once this period is over, it doesn't matter what happens - the investor is free to sell his shares and claim the relief. However, the trading and employee/office holder conditions must be satisfied throughout the whole of the time that the shares are held. So a person who makes an investment and decides to hold on to his shares after the three year period is up, is still at risk of the relief being denied on exit.

    A comparison with entrepreneurs' relief

    In fact these last two conditions illustrate a striking difference with entrepreneurs' relief. For a shareholder to benefit from entrepreneur's relief, the following conditions must hold5:

    • The shareholder must have a 5% stake in the company, which must consist of ordinary shares and must include the relevant voting rights;
    • The company must be a trading company or the holding company of a trading group (the trading condition); and
    • The shareholder must be an officer or employee of the company, or of a fellow group member if the company is part of a group.
    • All three conditions must be satisfied for at least a one year period, ending on the date that the shares are sold. So straight away we see that the holding period is shorter than for investors' relief.

    However, for entrepreneurs' relief there is no requirement that the trading and officer/employee conditions should apply throughout the period of ownership. In particular:

    • It isn't always fatal if the shareholder isn't an employee or officer of the company. It is possible to acquire the shares first and subsequently take up a position with the company. The clock starts ticking at this point and the shareholder only needs to hold on for another year;
    • All is not lost if the trading requirements fail. In the first place, there is a three year period during which the shares can be sold at the 10% rate, provided that the three main conditions were satisfied for the one year period before the company failed the trading condition6;
    • Alternatively, if the company stops being a trading company as a result of too many investment activities, the position can always be rectified by making an appropriate divestment. Once trading status is restored, the clock is re-set.

    By contrast, there is no such safety net for shareholders seeking to claim investors' relief. Because the trading and employee/officer conditions must hold for the entire shareholding period, it only takes a single breach of the relevant condition and the damage is done.

    In fact, if one looks closely at the other investors' relief conditions it is clear that once a condition is failed, it is failed forever. This is because these conditions require to be fulfilled at the point when the investment is made - if a condition fails one cannot go back in time to undo the damage. It is therefore crucial that investors get it right from the outset.

    Other conditions

    There are various other rules that apply:

    • As with entrepreneurs' relief, there is a lifetime limit of £10m worth of gains that may benefit from the 10% rate. Any gains that exceed this limit are taxed at the standard CGT rates7;
    • Under normal CGT rules, transfers between spouses and civil partners take place on a "no-gains no loss basis". This continues to be the case, but with the holding periods aggregated to ensure that the transferee inherits the transferor's tax position. As a consequence, the clock still keeps ticking so that the transferee need not wait the full three years before selling the shares8;
    • A company is quoted if it is listed on a recognised stock exchange. For these purposes, companies listed on AIM are not regarded as quoted, since they are not on the Official List of the London Stock Exchange9. Accordingly, investors' relief is available for AIM shares;
    • But note that the company need only be unquoted at the time that the shares are acquired10. A flotation will not taint the relief, though it will no longer be available for subsequent investments. This is an attractive feature for those who invest at the start-up phase and wish to continue to share in the subsequent growth of the business when the company expands and goes public;
    • It is also possible to hold the shares as a trustee of a settlement where there is a beneficiary with an interest in possession. There are additional restrictions on the beneficiary holding an office or employment with the company11.
    • \

    A comparison with the Enterprise Investment Scheme

    Why all the fuss about investors' relief when the Enterprise Investment Scheme ("EIS") is available? This scheme has its own set of tax breaks which, on paper, appear to be a lot more attractive:

    • An upfront relief on income tax when subscribing for shares in the company. 30% of the amount invested (up to £1m each year) can be set against the individual's income, provided that he continues to hold the shares for three years12;
    • It is also possible to defer capital gains on other assets by reinvesting the gains into an EIS investment13;
    • Provided that the shares are held for three years, there is a complete CGT exemption on sale14.

    Clearly EIS should be the preferred route when considering the tax breaks alone. However, it isn't that simple. One needs to bear in mind that the EIS and the other risk capital schemes are all extremely complex. It can be very easy to inadvertently break the conditions, resulting in investors having to repay their upfront income tax relief and lose the CGT exemption.

    The following are some examples of the constraints on companies seeking to raise funds through the EIS Scheme:

    • There is a cap on the number of company employees when the investment is made. This is set at 250, but companies in the knowledge and innovation sectors have a raised cap of 50015;
    • Since 18 November 2015, the company must have made its first commercial sale not more than 7 years before the issue of the EIS shares (10 years for knowledge/innovation companies)16;
    • There are limits on the amount of funds a company can raise, not just through EIS but also through the other risk capital and EU State Aid related schemes:
      • There is a one-year limit set at £5m that applies at the time the investment is made - this requires one to look back over the previous year and calculate how much funding has already been received - any amounts over the limit are not eligible for the tax incentives17;
      • Since 18 November 2015 a lifetime limit applies - from now on, a company cannot raise more than £12m though the various risk capital schemes unless it operates in the knowledge and innovation sectors, where the limit is set at £20m18;
    • An EIS company is prohibited from a long list of trades, including asset backed trades in the pubs and hotels sectors, and any trade connected with the renewables sector19. The list gets longer and longer.

    The result is that EIS favours start-ups and less mature companies with a special emphasis on knowledge and innovation. None of the above restrictions apply to investors' relief - all sectors can benefit, irrespective of what stage of the business cycle the company is at.

    A trap for family ventures

    Although the relief is simpler than other schemes, there are still traps lurking in the legislation.

    Consider the following question: You are planning to start your own business and need a bit of capital. Outside of the bank and your local friendly business angel, who are the people you are most likely to turn to?

    Friends and family of course. But you need to be careful about family members as the following example shows:

    Scarab Ventures - the appliance of science

    Dick Callum, an inventor, is the CEO of Scarab Ventures, a company that specialises in high precision scientific instruments. His sister Dot is willing to subscribe for shares in his company, but otherwise has nothing to do with the running of the business.

    Unfortunately, Dot is unlikely to benefit from investors' relief when she sells her shares because her brother is the CEO of the company - the prohibition against holding an office or employment extends to relatives who are considered to be connected to her20. But Dick needs to be an officer or employee of the company in order to qualify for entrepreneurs' relief when he sells his shares.


    Investors' relief provides an attractive means for companies to raise finance, and compares favourably with the various other tax advantaged schemes on offer. The rules are far simpler, with fewer barriers to entry - however, this doesn't mean that there aren't any traps. We shall explore this issue in a later article.

    This article can be downloaded in pdf format at Academia.edu.

    1. TCGA 1992 ss 169VB(2), 169VU(1).
    2. TCGA 1992 ss 169VB(6), (7).
    3. TCGA 1992 s 169VC.
    4. TCGA 1992 s 169M.
    5. TCGA 1992 ss 169I(6), 169S(3).
    6. TCGA 1992 s 169I(7).
    7. TCGA 1992 s 169VK. For entrepreneurs' relief see TCGA 1992 s 169N.
    8. TCGA 1992 ss 58, 169VU(3),(4).
    9. TCGA 1992 ss 169VB(2)(d), 288(1), ITA 2007 s 1005. A list of designated recognised stock exchanges can be found here.
    10. TCGA 1992 s 169VB(2)(d).
    11. TCGA 1992 ss 169VH, 169VI.
    12. ITA 2007 s 158.
    13. TCGA 1992, Schedule 5B.
    14. TCGA 1992 s 150A.
    15. ITA 2007 s 186A.
    16. ITA 2007 s 175A.
    17. ITA 2007 s 173A
    18. ITA 2007 ss 173AA, 173AB
    19. ITA 2007 s 192.
    20. TCGA 1992 ss 169VB(2)(g), 169VW(2), 286(2), (8).
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  • The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.

Satwaki Chanda

Owner and publisher at Tax Notes, an educational site containing articles on UK taxation, with a particular emphasis on business and property taxes.

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