Tax Writer Taxwriter Ltd
Share this content

A fistful of CGT reliefs

21st Mar 2016
Tax Writer Taxwriter Ltd
Share this content
iStock_Luis Alvarez_Too much

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? 

Current ER

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. 

What cost?

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?

Replies (14)

Please login or register to join the discussion.

By Satwaki Chanda
21st Mar 2016 18:24

This relief seems to be directed at business angels

My first impression is that this relief seems to be a safety net for EIS gone wrong. Note the same three year holding period.

I remember previously when we had taper relief, we would often advise EIS clients that if they lost EIS, at least they might have the comfort of the 10% taper rate. Though it's no comfort in having to pay back any EIS income tax relief. But at least all was not lost.

Taper relief for unquoted companies didn't require the company to be a personal holding company - the size of the stake didn't matter, and you didn't have to be an office holder. But then they abolished taper relief and replaced it with ER - where these things do matter. And so it took away the safety net.

Now we seem to have it back again in the form of ER Investor Relief. I wonder how much of this has been influenced by the recent changes to EIS as a result of EU rules. EIS and all the other schemes get more and more complicated each year, that one wouldn't be surprised if the rules are putting off angel investment.

So perhaps the answer is not another relief - but making the existing EIS et al simpler. (Wishful thinking).


Thanks (0)
By Michael C Feltham
21st Mar 2016 20:11

Do We?

Do we really need another CGT relief?

Clearly, yes.

When Wilson introduced CGT, he stated (I paraphrase):

"A man goes into the City, buys something for say £1,000 today: and tomorrow, sells it for £2,000 tomorrow. And pays no tax!"

CGT is a wholly iniquitous imposition of tax; since values rise only due to government's slavering incompetence in trying - and failing - to run a stable economy; and monetary inflation which results from fiscal mismanagement causes inflation of most asset classes since the monetary unit of exchange of value depreciates. Caused directly by government printing money and excessive sovereign borrowing.

Ergo, governments are taxing citizens on the direct results of government's own incompetence!

Since its introduction, Thatcher at least created indexation: Lawson ramped up CGT from a basic ad valorem figure. Brown abolished indexation and introduced Taper Relief. Darling removed taper relief and set one rate at a punitive 18%.

If Wilson had have really wanted to tax such speculation, then all he had to do was impose income tax on those who sought to subvert tax codes as then. Do say, car traders pay CGT or Income Tax? Do Antique dealers?

If government really wish to encourage true enterprise, rather than pretending to, then abolishing retirement relief on businessmen when they sell their company after many years of struggle, heartache, sweat, investment etc is a disincentive. After all, whatever someon manages to amass in capital terms, including their retirement income, pensions etc, is once again taxed, despite the reality they have accumulated such funds after paying tax for the wole of their working lives.


Thanks (0)
By jon_griffey
22nd Mar 2016 10:13

Investors relief

It would appear then that the advice to ltd co clients is to ensure that all shareholders should aim to acquire shares in the company by way of subscription, never by transfer.

In fact failing to spot this and advise accordingly looks like the latest PI risk.

Another angle - if an individual has used up their £10M ER allowance then for their next disposal should they then take steps to deliberately fail the ER conditions in order to qualify for IR?

More complexity!

Thanks (2)
By hiu612
23rd Mar 2016 12:08

Good points

Since ER must be claimed (voluntary) there may even be clients who meet both sets of criteria and so ask whether they should make the ER claim or the IR claim. This is definitely going to be an interesting development. Personally I think it bridges the gap between ER and EIS quite nicely. I have a client about to make an investment, 2/3 of which may qualify for EIS but 1/3 won't (money used to buy shares). Potentially this is a nice safety net for him.

Thanks (0)
By AndrewV12
23rd Mar 2016 11:17

Good points well made

A nice compact article.

Thanks (1)
By Paul Soper
23rd Mar 2016 12:37

Ironies abound...

Michael (above) started off by saying... "When Wilson introduced CGT, he stated (I paraphrase):

"A man goes into the City, buys something for say £1,000 today: and tomorrow, sells it for £2,000 tomorrow. And pays no tax!"

The Tories had already introduced, back in 1962, a tax (actually an income tax charge under Schedule D Case VII) on speculative gains from most types of property bought and sold within 6 months, or in the case of land bought and sold within 3 years.  We can blame 'yer Darlin' 'Arold' as Alf Garnett might have it, and certainly he did introduce both corporation Tax AND CGT in the same Finance Act in 1965 but if the statement above is truly his it was ingenuous to say the least.  In deded because the rates of income tax and indeed surtax) were so much higher than the rates of CGT that the short term gains tax continued to take priority until 1968!

But do we need another CGT relief, of course we do.  Under Taper Relief any holding in an unquoted trading company qualified (and for employees even investment companies) but it was a retrograde step in 2008 when Alistair Darling, having got himself into a hole by announcing that CGT would be charged at only one 18% rate, rewarding the speculators but penalising business, needed to create an 'entrepreneurs' relief' but being too lazy to create one simply brought back the old retirement relief with only minor modifications.  Now you needed to own at least 5% and be an employee or director for at least a year.  Encourage investment?  Hardly, penalise family companies where holdings were than 5% - of course, penalise employees, most likely to own less than 5%, certainly.  I am surprised the author of the article asks the question in the first place.

Thanks (0)
By Joe Soap
23rd Mar 2016 16:54

Gabriel vs the Angel

So Angela Knight, Chair of the Office of Tax Simplification loses out again to Gabriel Osborne, Chair of the Office of Tax Complexification.

But I guess she always will

Thanks (1)
By ShayaG
23rd Mar 2016 17:29

Inflation is not the same as capital gains

I'd like to think that the value of shares moves in response to other factors as well as inflation such as the profit motive, and the quality of management. Hence indexation allowance.

Then there is also a strange equation of tax payment with guilt. Tax is not a fine for doing something wrong. It is a collective act of contribution from those who have done right towards building hospitals, communities, pensions, defence, etc that nobody could provide for one their own. It's true that governments try to incentivise (or more precisely, to appear to incentivise) various forms of behaviour such as entrepeunership through the tax system and this perhaps contributes towards the guilt mentality.

Personally I cannot see why creating value through the sale of their equity in businesses should be taxed at a lower rate than the hard working employees who helped create the value in that equity interest.

Thanks (0)
By cfield
23rd Mar 2016 20:57

Rewarding enterprise

ShayaG wrote:

Personally I cannot see why creating value through the sale of their equity in businesses should be taxed at a lower rate than the hard working employees who helped create the value in that equity interest.

It's because the employees did not risk any of their own capital or sacrifice a cushy job elsewhere to make a go of it.

You make it sound as though the employees do all the work and the bosses reap the rewards, and that somehow that's wrong, but the employees have got no right to benefit from the entrepreneur's business acumen or the investors willingness to risk their money. They're paid the going rate to do a job and that's all they should get unless their bosses are kind enough to let them participate in a staff share scheme.

They didn't create the value any more than the plant and machinery did. At the end of the day, they're just another resource. That may sound harsh, but it's true. You don't go into business just to share the wealth with all the staff you take on. It's not a workers cooperative. Would they be willing to put their homes up as collateral and lose the roof over their heads if the business fails? I don't think so!

And yes, entrepreneurship should be taxed at a lower rate than labour, because this country needs to incentivise new enterprise and encourage it to grow. Anyone can apply for a job, but it takes a special breed of person to start up a new business and create jobs for others.

Thanks (0)
By Rebecca Cave
24th Mar 2016 09:53

Edit re : employment condition

I have just amended this article in response to a fellow tax professional who pointed out that the proposed revisions to the law say that " The extension to ER, introducing investors’ relief, will apply to gains accruing on the disposal of certain qualifying shares by individuals (other than employees and officers of the company). "

So from that one could assume that shares held by officers and employees of the company won't qualify for the new investor relief.

We will know more when the Finance Bill 2016 clauses are published later today.

Thanks (0)
By Rebecca Cave
24th Mar 2016 10:39

Finance Bill 2016 is out

The draft legislation regarding Investors' Relief is in Schedule 14. This confirms that the shares must be ordinary shares and the investor must not be an officer or employee of the company art any time in the period the shares are held. This condition extends to any person connected with the investor.

In conclusion the new Investors' Relief will be a less useful than we expected, as directors, employees and their relatives will be barred from taking advantage of the relief.


Thanks (1)
By oldiegoldy
24th Mar 2016 11:38

Could you please share the link (to updates today) if possible.



nothing here yet?



Thanks (0)
By Rebecca Cave
24th Mar 2016 12:09

Here is the Finance Bill 2016

All 583 pages - also 2 volumes of notes!

Thanks (1)
By Satwaki Chanda
24th Mar 2016 21:46

Looks like another type of EIS share

Just skimming through the rules for IR in FB 2016 Schedule 14.

Some of these rules look awfully like the same conditions for EIS. Such as the rules restricting investors from receiving value (i.e. getting an early return on their investment) - there are rules for working out how much the value is in monetary terms - all using the same words and phrases as in the EIS legislation.

So to answer Rebecca's original question: "Maybe we didn't need a new relief if it was going to be similar to the existing EIS reliefs - especially if it's going to be just as complicated".

That said, Entrepreneurs' Relief and the new Investors relief aren't subject to State Aid as EIS is. So there doesn't need to be the same level of restrictions on fund raising and how the company can employ the money as with the EU rules.

Thanks (0)