We recently published a blog about various established government-backed, tax benefit schemes open to investors, namely the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS).
An alternative scheme which is open to investors, and which also offers attractive but different tax benefits, is Investors’ Relief (IR).
What is Investors’ Relief?
Introduced in 2016, IR is a capital gains tax relief for investors who have invested in qualifying shares.
IR was introduced in order to further incentivise external investors to invest in private companies in the medium to long term.
How does IR differ from SEIS, EIS and Entrepreneurs’ relief?
The key tax benefit of IR is a 10% rate of capital gains tax on disposal of shares acquired under the scheme.
Whilst IR is similar to entrepreneurs’ relief (in that both reliefs offer a 10% rate of capital gains), the key difference is that under IR, the investor cannot be an employee or director of the company whilst owning the shares (which is a requirement of entrepreneurs’ relief). IR is, therefore, more suited to external investors in this regard.
Additionally, unlike SEIS and EIS, there is no maximum investment under IR, and certain business types (such as hotels, property development, etc), which are excluded from SEIS and EIS, can be utilised for IR purposes.
There are a number of other key criteria for an investment to qualify for IR, including:
- a £10m lifetime limit (which is similar to, but independent of, the entrepreneurs’ relief lifetime limit); and
- for the relief to become available, the investor must hold the shares for a minimum of 3 years.
Suitability
The IR can be used effectively in a number of circumstances in order to obtain favourable capital gains treatment. Some examples of when IR may be particularly useful is where some or all of the following apply:
- the investor intends to invest over a longer period of time in a private business;
- the investor wishes to remain “external”, rather than becoming involved in the business at board level;
- the investor has utilised their allowances under the SEIS and/or EIS schemes (or where the business which the investor wishes to invest in does not otherwise qualify for those schemes).
As with the other tax incentive investment schemes, the criteria to satisfy is complex. Legal and tax advice should be taken to ensure that the desired tax advantages are in place and that your investment is protected.
If you wish to discuss any issues around investors’ relief, or if you require any other investment advice, please contact a member of our Corporate Commercial department to discuss.