New investors 10% tax rate starts to apply
QUESTION: A new tax relief now applies for the disposal of shares by an individual after April 6 2019. The new tax relief, known as Investors' Relief, taxes the disposal of shares at a rate of 10 per cent. I've never fulfilled the conditions for Entrepreneur's Relief. Will I be able to claim Investors' Relief on the disposal of my investment if I'm not an employee of the company and if I don't own more than 5 per cent of the shares?
ANSWER: Investors who previously subscribed for new shares in unlisted trading companies and are disposing of their shareholding after April 6 may be surprised that their investment profit is only taxable at 10 per cent, particularly if they are not employees of the company and if they don't hold more than five per cent of the shares in the company.
The new Capital Gains Tax Relief was introduced in Finance Act 2016 for investments in qualifying shares in trading companies. The aim was to encourage external investors to invest in unlisted trading companies for a minimum period of three years. The maximum potential tax saving under Investors' Relief is £1 million and it is available both to individuals and also to trustees. The new tax relief is available without the need for the investors to have been officers or employees of the company.
The relief will also be very valuable to existing investors who may have exceeded the limits for Enterprise Investment Scheme tax relief or Seed Enterprise Investment Scheme tax relief and will allow many companies to attract further investment outside these already existing schemes.
The relief is part of a package of capital gains tax reliefs available in the UK to investors who acquire shares in unlisted trading companies. Investor's Relief works in a similar way to the well-established Entrepreneur's Relief, but has in many respects more relaxed conditions attached. The new relief applies to investors who are neither officers nor employees of the company and who subscribe for new shares on or after March 17 2016 and hold the shares for a minimum period of three years. Very importantly, unlike entrepreneur's relief there is no requirement to hold five percent or more of the shares in the company or the voting rights either.
There are however various other conditions attaching to the availability of the relief to ensure that the new ordinary shares are subscribed for with ‘new money'. This typically means that the investor must pay for the shares wholly in cash and the shares must be fully paid up when they are issued. Except in very limited circumstances, such as certain unremunerated directors and investors, there must be no prospect that the investor will become an employee, at the time they invest in the company. The minimum three-year holding period means that Investor's Relief will be available for the first time for disposals after April 2019. The rules are complex and wide-ranging and care is required if the investor or an associate of the investor receives value from the company either one year before the investment or within three years after the investment. It is necessary therefore to ensure that all conditions are fulfilled during this period to ensure that this valuable tax relief is maintained and enjoyed at the point of sale.
:: Janette Burns (email@example.com) is associate tax director at PKF-FPM Accountants Limited (www.pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.