Investors’ Relief – A new route to 10% tax
The 2016 Budget included the surprise announcement of a new Investors’ Relief giving a 10% tax rate on share disposals. Although this was described as an extension to Entrepreneurs’ Relief (ER), it is in reality opposite to ER in many ways with the main similarity being a 10% tax rate on the first £10m of gains. Investors’ Relief is in addition to ER so you can have £10m of lifetime gains under ER and £10m of lifetime gains under Investors’ Relief.
The main conditions to achieve this relief are:
- The investor subscribes for the shares on or after 17 March 2016;
- The shares are ordinary shares;
- The shares were unlisted when acquired;
- The company is a trading company or holding company of a trading group;
- The shares are held for at least three years, and
- The investor is not an employee or officer of the company while they hold the shares. This also covers people connected with the investor.
This relief is welcome however the background to its introduction is interesting.
ER has been with us for some years now and has become the tax goal for business owners. Most entrepreneurs are well versed in what they need to achieve the 10% tax rate. For shareholders the usual rules are that, for 12 months leading up to a disposal, they hold 5% of the voting rights and ordinary share capital and are employees and officers of a trading company or group. In addition, EMI share option holders can achieve ER for smaller shareholdings since 2013.
The detailed ER rules were being utilised to achieve a 10% tax for people who were perhaps not the original target of the legislation through complicated “Manco” structures. These enabled less than 5% shareholders who were not employees of the underlying group to achieve ER. This often benefited the private equity industry whose low tax rates caused much negative comment. In December 2015, HMRC announced changes to the detailed ER rules that prevented these Manco structures, so removing the 10% rate from such investors.
It is therefore surprising perhaps to now see a relief being introduced that provides such investors with a much simpler route to achieve a 10% tax rate. There is no need for complicated Manco structures when you have the new Investors’ Relief! The three year holding period fits well with the usual private equity ownership period.
Although this new relief will benefit many investors and encourage investment in unlisted companies, the tax landscape for company shareholders is now even more of a patchwork that does not always make sense, for example, does it make sense for employees or directors holding less than 5% of the shares to be taxed at full capital gains tax rates when external investors can qualify for a reduced 10% tax rate?
Our tax team led by Holly Bedford-Bell provides specialist advice to shareholders, management and companies on acquisitions, disposals and corporate restructurings. Please do not hesitate to contact us on 01491 579740 for more information.
Article written by Holly Bedford-Bell for The Business Magazine – May edition