A fistful of CGT reliefs
The Budget has proposed a new CGT relief for investors in unquoted companies, but Rebecca Cave asks: Do we really need another CGT relief?
In the Budget on 16 March 2016 the Chancellor proposed yet another capital gains tax relief for gains on the disposal of shares – a new version of entrepreneurs’ relief for long-term investors. In my book on CGT reliefs for small businesses I cover 22 different CGT reliefs, and six of those can apply on the disposal of shares in unquoted companies:
- Enterprise investment scheme (EIS)
- Seed enterprise investment scheme (SEIS)
- Social investment tax relief (SITR)
- Transfer to employee ownership trust (EOT)
- Employee shareholder status shares (ESS)
- Entrepreneurs’ relief (ER)
So how is the new ER Investor relief different to the current ER and to the existing venture capital reliefs?
The existing ER can apply on the disposal of shares in the investor’s “personal company”. It can also apply to the disposal of various other business assets, but in this article I am comparing the current ER conditions for shares with the proposed ER Investor relief.
|Condition||Current ER||Investor ER|
|Acquisition of shares||From anyone at any time - shares can be second hand||Subscribe for new shares on or after 17 March 2016|
|What shares qualify||Includes all types of shares, preference and securities (debentures)||Not clear yet, but possibly only ordinary shares|
|Period to hold shares||12 months to date of disposal||36 months to disposal, period starts no earlier than 6 April 2016|
|Minimum proportion of shares in issue to hold||5% of ordinary share capital||No minimum|
|Employment condition||Investor must be employee or officer of company for at least 12 months to disposal||Not clear yet, but possibly: must not be employee or officer of the company|
|Company||Trading company or holding company of trading group||Unquoted trading company or holding company of trading group|
|Maximum life time gains covered by ER||£10 million||£10 million|
Note: the £10 million cap for the current ER is separate to and addition to the £10 million cap for the new Investor ER.
Venture capital reliefs
The three venture capital reliefs: EIS, SEIS and SITR all give the investor full exemption from CGT on any gains made while holding the shares acquired under those schemes, if the accompanying income tax relief has not been withdrawn. In all cases the EIS/ SEIS or SITR shares must be held for at least three years - like shares issued for the new Investor ER.
However, to achieve both income tax relief and CGT relief the investors in venture capital schemes are not permitted to hold more than 30% of the company they are investing in. There is no such restriction for Investor ER, although there may be more detail on this point in Finance Bill 2016, which is expected to be published ion 24 March 2016.
Investors under EIS, SEIS and SITR also have to be careful not to take value (apart from director’s fees) from the organisation they invested in during the first three years. That restriction appears to be missing from Investor ER, - but check the Finance Bill 2016 when it’s published.
Apart for the cost to tax advisers in having to learn about another form of CGT relief, and for Bloomsbury Professional to add extra chapter in my CGT reliefs book, there will be other more quantifiable costs. HMRC will have to make changes to its IT systems which will cost in the region of £1 million – according to the CGT policy paper released with the Budget.
Is it worth it? What do you think?