Investing in business
The government has announced increased tax relief for investments in small companies. There are three commonly utilised reliefs.
Entrepreneurs' relief (ER)
ER may be available in respect of disposals of businesses, certain business assets, and shares held by employees or directors holding more than 5% of the company. The relief can also be claimed by individuals and trustees of certain types of settlements. The relief has a lifetime allowance, which is GBP 10 million. Everyone starts with a 'clean sheet' on 6 April 2008 (so disposals before this date will not affect the overall allowance). Eligible gains up to the lifetime allowance will be taxed at a 10% CGT rate.
Investors’ relief (IR)
IR allows investors to enjoy a lower rate of tax of 10% on lifetime gains of up to GBP 10 million on investments into shares in non-listed trading companies, which are issued after 16 March 2016 and held for at least three years before a disposal. This relief is in addition to ER. Although IR has some similarities to ER, the relief is restricted to external investors only and is more akin to EIS relief, although with fewer restrictions over the type of company that can qualify and how investments are structured.
Employee shareholder status (ESS)
There are detailed tax rules surrounding the relatively new ESS. The aim of this legislation is to enable employees to be able to be given free shares in exchange for giving up some of their employment rights (such as the right to claim unfair dismissal and statutory redundancy pay). The main tax points are:
- Complete CGT exemption on up to GBP 50,000 worth of shares awarded.
- Shares must be fully paid up and awarded for no consideration (other than giving up certain statutory employment rights).
- The value of the shares is based on their unrestricted market value.
- Anti-avoidance legislation prevents employees who own, or have owned in the last year, 25% or more of the voting rights of the company (either by themselves or with people connected with them) from benefitting.
The first GBP 2,000 of shares will not attract income tax. The CGT exemption may make it very attractive to employees who were planning to acquire shares anyway and are not concerned about the loss of employment rights.
The income tax and CGT reliefs on shares issued to an employee under an ESS agreement made on or after 1 December 2016 have been withdrawn. Tax relief in respect of shares issued under ESS agreements made before that date is not affected.
Enterprise investment scheme (EIS)
Investments in businesses that qualify under the EIS benefit from income tax, CGT, and IHT relief. Investments of up to GBP 1 million will get 30% income tax relief. Any CGT previously arising on the funds that are invested (i.e. from the disposal of a previous investment) are able to be deferred, and any gains made on the EIS shares are tax free. IHT relief is also available at 40%.
The qualification rules for the business itself are relatively complex, and local advice should be sought.
Venture capital trusts (VCTs)
VCTs are listed vehicles that, in essence, invest in a number of underlying EIS type companies (thus investors sometime choose VCTs over EIS companies as a way of diversifying their portfolio). Income tax relief is again given at 30% of the investment made, and gains made on the investment are tax free. In addition, dividends from ordinary shares in VCTs are income tax free.
EIS and VCT investments are subject to a ‘disqualifying purpose’ test, which is designed to exclude companies set up for the purpose of accessing the tax reliefs.
Specifically, there is an exclusion on the use of VCT and EIS funds for the acquisition of shares in another company. This exclusion is designed to help achieve continuing EU state aid approval, which prohibits state aid from funding buyouts.
There is a cap on income tax reliefs that are not already subject to a specific cap (such as pension contributions and EIS). The reliefs are limited to GBP 50,000 or 25% of an individual’s income, whichever is higher.
In addition, many of the reliefs, such as those available to obtain relief on monies borrowed to invest in a business, may limit economic growth and investment. See above for more information.