Home Insights What is the new Investors’ relief?

What is the new Investors’ relief?

By Ensors Team
26th Jun 2018

The Government introduced a new relief known as ‘Investors’ Relief’ in Finance Act 2016 to complement the current entrepreneurs’ relief. Investors’ relief applies to disposals made by certain long-term investors in unlisted trading companies who have subscribed for their shares. Unlike entrepreneurs’ relief, the investors must not have any connection with the company. However, there is also no minimum shareholding requirement with investors’ relief like there is with entrepreneurs’ relief.

Investors’ relief relates to where a qualifying person disposes of qualifying shares which had been issued to the person on or after 17 March 2016. A qualifying person is either an individual or the trustees of a settlement. The relief has to be claimed (i.e. it is not automatic) and is reported to HMRC on the tax return for the year in which the disposal takes place.

Where the necessary conditions for the relief are met, capital gains are taxed at a rate of 10% – half of the normal main rate.   It should be noted that there is a separate lifetime limit for an individual of gains qualifying for investors’ relief of £10 million.  Any gains which exceed this amount are taxed at the main rate of capital gains tax (i.e. 20%).  There is therefore the opportunity for an individual to take advantage of both entrepreneurs’ relief and investors’ relief thereby receiving significant gains at low capital gains tax rates.

Investors’ relief conditions

For a qualifying person selling shares, in order for investors’ relief to be available, the following conditions must be met: –

  • The company must either be a trading company or the holding company of a trading group;
  • The shares must be newly issued ordinary shares (being defined as all share capital of a company other than shares which only entitle the shareholder to fixed rate dividends) and have been subscribed for by the individual in cash. The shares must be fully paid up at the date of issue. The shares must be subscribed for and issued for genuine commercial reasons and not as part of arrangements, the main purpose of or one of the main purposes is to secure a tax advantage to any person (‘qualifying shares’);
  • The investor has held the shares continuously for a period of three years from issue until immediately before the disposal (the ‘shareholding period’);
  • The investor or a person connected with the investor was not a ‘relevant employee’ of the company at any time when the shares were held. For these purposes, relevant employee is defined as broadly a person who has been an officer or employee of the company that issued the shares or of a connected company at any time during the shareholding period.

Special rules apply for investors’ relief purposes to determine whether shares held by a qualifying person following a reorganisation are qualifying shares, potentially qualifying shares or excluded shares. The treatment depends on whether the reorganisation falls within the parts of the tax legislation relating to reorganisations or within the takeovers and reconstructions sections. This is beyond the scope of this blog, however these rules will need to be considered in such circumstances.

Potential problem areas

Although this is a relativity new relief, there are several potential areas where problems may arise with investors’ relief claims.

Receipt of value – Where shares are issued to a qualifying person and that person receives value (other than insignificant value not exceeding £1,000) from the company during the ‘period of restriction’, the shares will be treated for investors’ relief purposes as excluded shares. The ‘period of restriction’ is the period beginning one year before the shares are issued and ending immediately before the third anniversary of the date of issue. Receipt of value can include but is not restricted to repaying, redeeming or repurchasing share capital, repaying a debt due to the investor which was incurred before the issue of the shares, waiving or releasing any liability of the investor to the company, making a loan or advance to the investor, providing a benefit to the investor or transferring an asset to the investor at undervalue or acquiring an asset from the investor in excess of its market value. However, the receipt of a dividend on the shares which does not exceed a normal return on the investment is not treated as a receipt of value.

The trading requirement – the company (or group) must be carrying on a trade.  The legislation defines a trading company as a company which carries on trading activities and which does not carry on other activities to a substantial extent.  This means, for example, that shares in a property investment company will not qualify for investors’ relief.  A particular difficulty may arise with companies which are carrying on a trade but which are either holding significant surplus cash or have made investments with such cash.  Such circumstances need to be considered carefully on a case by case basis to determine if investors’ relief may be available.  It is possible that the holding of cash on deposit does not amount to an activity and thus may not prevent investors’ relief from being available especially if the cash has merely been retained for future use in the trade. However, the holding of investments could amount to a non-trading activity, thus jeopardising investors’ relief, particularly if the company managed the investments itself.

Share exchanges – often, when shares are sold in a private company, part of the consideration may be shares in the acquirer.  Such share exchanges, if structured appropriately, result in no capital gain on the share exchange with the new shares being treated as acquired at the same time and for the same price as the original shares.  A difficulty may come when these new shares are sold, as the investors’ relief conditions may not apply to this sale.  In these circumstances, the legislation allows for an election to be made to treat the share exchange as taxable, with investors’ relief thus potentially available.  This election may accelerate the timing of tax payments, with potential cashflow issues, but can reduce the overall amount of capital gains tax ultimately payable.


The extension of the 10% capital gains tax rate to external investors is welcomed and is intended to provide a financial incentive for individuals (and certain trustees) to invest in unlisted trading companies over the long term to enable such companies to be able to access the capital that they need for expansion.

For more information please contact Robert Leggett.