Individual - Other tax credits and incentivesLast reviewed - 18 December 2022
Investing in business
Business asset disposal relief (BADR) - formerly entrepreneurs' relief (ER)
BADR applies to an individual’s gain in respect of a disposal of certain assets and provides a 10% rate of CGT on qualifying lifetime gains rather than the main CGT rate (normally 20%/28%). From 11 March 2020, the limit of gains per individual that can qualify for BADR was reduced to GBP 1 million from GBP 10 million. BADR is often relevant to employees owning shares, as it applies, subject to meeting the qualifying conditions, to shares acquired on exercise of Enterprise Management Incentive (EMI) options as well as to shareholdings in a 'personal company'. A personal company is a company in which an employee or director owned at least 5% of the share capital and votes and:
- For disposals from 6 April 2019, all the relevant conditions have been met for a two-year period prior to disposal (prior to this it was 12 months).
- With effect from 29 October 2018, two further tests were added to the definition of personal company, which require a 5% interest in distributable profits and net assets of the company, as well as nominal share capital and votes.
The changes affecting 5% shareholdings are not relevant to shares acquired on the exercise of EMI options, as the 5% tests do not apply, but the change of holding period from one year to two years does apply in all circumstances.
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 separate to BADR. Although IR has some similarities to BADR, 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.
Enterprise investment scheme (EIS)
Investments in companies that qualify under the EIS can benefit from income tax, CGT, and IHT reliefs. EIS qualifying companies must be approved by HMRC.
EIS income tax relief
Investments of up to GBP 1 million (GBP 2 million if at least GBP 1 million is into knowledge intensive companies [KICs]) into qualifying EIS companies 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 certain family members cannot hold more than 30% of the shares or be an employee (or director, except in certain specific circumstances) of the company. A qualifying company can receive up to GBP 5 million of investment via EIS in any given 12-month period, increased to GBP 10 million if the company is also a KIC. There is also a lifetime limit of GBP 12 million (GBP 20 million for a 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 within the prescribed time period. 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). There is no limit on the amount of reinvestment relief (unlike EIS income tax relief). 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.
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 up to the permitted maximum (currently GBP 200,000).
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 as funds raised must be used for the long term growth and development of the business.