Investing in business
There are four 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. Eligible gains up to the lifetime allowance will be taxed at a 10% CGT rate. All the main political parties have made comments in connection with ER recently and is it widely anticipated that this relief will be reformed in the near future.
There has been a lot of recent speculation that ER will be revised of abolished in the near future possibly in the 11 March Budget, although clearly this is not guaranteed.
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 discussed below, although with fewer restrictions over the type of company that can qualify and how investments are structured. If ER is reformed this may impact on IR too.
Enterprise investment scheme (EIS)
Investments in companies that qualify under the EIS can benefit from income tax, CGT and IHT reliefs.
EIS income tax relief
Investments of up to GBP 1 million into a qualifying EIS company will get 30% income tax relief, provided that the investor or any of their associates are not 'connected' with the company. This broadly means the investor and one's family cannot hold more than 30% of the shares or be an employee of the company. In some circumstances up to £2m can be invested in shares but any amounts in excess of £1m must be invested in knowledge intensive companies (KIC).
EIS disposal relief
If the investment qualified for income tax relief and this has not been withdrawn, then provided the shares are held for three years there is no CGT due on the gain on the EIS shares.
EIS reinvestment relief
Gains on the disposal of any asset can be deferred if the proceeds of the sale of the asset are reinvested into qualifying EIS shares. To qualify for EIS reinvestment relief, the individual must be UK resident but can be connected with the company (unlike the position with EIS income tax relief where broadly they cannot). The deferred gain comes back into charge in a number of situations, including if the individual becomes non-UK resident or if the EIS shares are sold or cease to qualify as EIS shares.
The rules for EIS approved funds will be changing on 6 April 2020 to take account of the:
- changes that will focus approved funds on knowledge-intensive investments
- increased flexibility available to fund managers in the timing of investments
Inheritance tax (IHT) business property relief (BPR)
EIS shares that have been held for two years may qualify for complete IHT relief under the BPR provisions, subject to all the conditions being met.
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.