Unlocking Investors Relief: A Tax-Efficient Alternative
Investors’ Relief (IR) offers a unique opportunity for companies in search of external investment and investors seeking substantial tax advantages. While traditional investment tax breaks might not always be a perfect fit, IR steps in to provide a tax-efficient alternative. In this blog post, we’ll explore the key aspects of IR, shedding light on how it can benefit both businesses and investors alike.
Investors’ Relief (IR)
- IR is aimed at companies looking for external investment and would be suitable for investors looking for a tax break where, for one reason or another, other investment tax breaks like EIS or SEED EIS or Business Asset Disposal Relief are not the right fit for either side.
- IR will be available where there is a disposal of qualifying shares in an unlisted trading company (or holding company of a trading group).
- Upon disposal, subject to a £10 million lifetime limit, any gain would attract a CGT rate of only 10% as opposed to 20%.
Definition of qualifying shares
- For IR purposes, the investor must hold qualifying shares for at least 3 years before disposing of them.
- Additionally, the investor must subscribe to fully paid-up ordinary shares at market value.
Definition of qualifying investor
- A qualifying investor could be an individual or an interest in possession trust where the underlying beneficiary has an interest in the shares.
- The investor must not receive value (cash or in-kind) exceeding £1,000 in total from the company during the period 1 year before and 3 years after the investment. This does not include dividends or true commercial payments (e.g. a supplier who is also an investor).
- The company must not employ the investor or any persons connected to them (e.g., family) throughout the share ownership period.
However, there are a couple of exceptions to this point. Assuming there was no intention of doing so at the time of making the investment, the investor can:
- Become an unpaid director, however reasonable legitimate business expenses can be paid. Or
- Become an employee so long as at least 180 days have elapsed since the investment. The company can pay a salary and benefits as long as they are proportional to the work the investor does.
Investors’ Relief (IR) stands as a valuable alternative for companies and investors seeking tax-efficient options. With its focus on unlisted trading companies and a reduced Capital Gains Tax rate of just 10%, IR offers a unique opportunity for those not fitting the traditional tax break criteria.
Tip
Contact us to review your situation and explore if you could benefit from Investors’ Relief.
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You can read more about Tax here
We also have a helpful post on Capital Gains Tax here
