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Insights

17 February 2017

Investors’ Relief and EIS/SEIS– tax reliefs encouraging investment in trading companies

UK investors in trading companies may now benefit from a new form of tax relief, known as “Investors’ Relief”, that was introduced by the UK Government in 2016.

There are now a number of opportunities available for investors to receive generous tax reliefs in connection with their investments in trading companies.  Investors’ Relief is likely to be of particular interest to investors who do not expect to qualify for tax reliefs because the Enterprise Investment Scheme (“EIS”) and Seed Enterprise Investment Scheme (“SEIS”) do not apply in their case (for example, an investment in a property development company).

Investors’ Relief

Investors’ Relief was introduced in order to “attract new capital into unlisted companies … supporting businesses to grow”. The relief is intended to achieve this aim by enabling qualifying investors to pay tax on up to £10 million of gains realised after a 3 year holding period at half the usual tax rate i.e. 10% instead of 20%.  The relief potentially applies to investments in new issue unlisted ordinary shares (including shares listed on AIM) made on or after 17 March 2016.

For various reasons, Investors’ Relief has sometimes been referred to as an extension to Entrepreneurs’ Relief, another form of tax relief potentially applicable to investments in trading companies.  However, Investors’ Relief has more in common with EIS and SEIS, and is essentially targeted at the same audience, namely the outside investor. 

EIS and SEIS

The EIS regime has been in place for over 20 years and provides a number of tax benefits for investors.  The SEIS regime was introduced more recently and is targeted at “start-up” companies. Although the regimes have become more generous in some respects as time has passed, the conditions that need to be satisfied for the reliefs to apply have become increasingly complex. 

In contrast, qualification for Investors’ Relief is relatively simple and so may apply where EIS and SEIS are unavailable.  The differences between the requirements that need to be satisfied to qualify for EIS and Investors’ Relief are highlighted in the summary comparison table overleaf.

How can we help you

Our award-winning work in the EIS/SEIS sector enables us to advise both investors and companies with confidence regarding the application of the new Investors’ Relief and, in particular, whether it may be available for any contemplated fundraising.

In relation to EIS and SEIS, we provide a full service for investors and companies that spans the submission of advanced assurances to HMRC to the preparation and review of investment documentation to ensure EIS/SEIS is not prejudiced.  Our expertise in this area was recently recognised by the EIS Association, which awarded us “Best EIS/SEIS Legal or Regulatory Adviser 2015”. We also continue to support through lobbying and responding to HMRC consultations.

Condition

EIS/SEIS

Investors’ relief

Applicable Capital Gains Tax rate:

0%

10%

Lifetime limit for gains accessing reduced rate:

Not applicable

£10 million lifetime limit

Other tax reliefs:

IT relief, CGT deferral, loss relief

CGT only

Investee company trading/size/age  restrictions:

Yes

Trading requirement only

Holding period:

3 years

3 years

Minimum shareholding size:

Not applicable

Not applicable

Maximum shareholding size:

30%

None

Type of shares:

Unlisted ordinary shares (incl. AIM shares)

Unlisted ordinary shares (incl. AIM shares)

Employee/officer:

Must not be*

Must not be*

Investee company with UK presence:

Required

Not required

* Some exceptions including for so-called “business angels”

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