Although introduced in the Finance Act 2016, Investors’ Relief (‘IR’) has existed in the shadows of Entrepreneurs’ Relief (‘ER’) and both EIS and VCT reliefs.
However, the economic effects of Covid-19, the magnitude of which is still to be seen, combined with the scaling back of ER does present IR with the opportunity to shine more brightly as an attractive option for both small to medium sized businesses and high net worth individuals.
Prior to the Chancellor’s announcement on ER in the pre-lockdown Budget, the headline benefits of IR were incredibly similar to ER, primarily being a rate of 10% CGT on qualifying gains up to a lifetime limit of £10m.
The key distinction with the two reliefs is that ER was designed for owner managed businesses, ie shareholders who were actively involved in a business as an employee/officer, whereas IR is intended for ‘business angel’ type investors who are specifically prohibited from being an employee/officer of the business.
This distinction combined with the tax breaks available to high net worth individuals via the SEIS/EIS and VCT regimes who are looking to ‘take a punt’ on startup and high growth companies has meant it’s been difficult to visualise a clear and obvious purpose for IR.
As we find ourselves approaching the new normality and SMEs across the land awaken from a full or semi hibernation, many of these SMEs may require additional funding to re-energise their attempts to simply survive, get back to where they were pre the pandemic or take advantage of opportunities which may arise. Consequently, for any business owners seeking to obtain equity investment from such individuals, it will be worthwhile familiarizing themselves with IR as a way to enhance their chances of successfully obtaining investment.
As a specialist corporate finance firm, we have great experience and links with the banks, alternative lenders and private equity houses and there is no doubt these liquidity avenues will continue to be the main port of call for most businesses. However, IR does offer wealthy individuals who are perhaps looking to ‘get back in the game’ or use their experience to help a shareholder team/business they believe in, flourish. This would therefore usually be more of an ‘emotive’ investment than can be facilitated via the EIS and VCT regimes or where a business simply does not qualify under those regimes.
As ever, there are a number of conditions that need to be met for IR to be available, the headline ones being:
– The shares must be Ordinary, fully paid up shares (on issue) in a trading company or group.
– The shares need to have been held for three years.
– The investor or a connected person of the group cannot be an employee or officer of the group.
– There are anti-avoidance provisions and exemptions for unpaid directors.
If as either a business owner or speculative investor, you would like to explore IR in more detail, please do not hesitate to contact the JDC team.