This Content Was Last Updated on February 9, 2017 by Jessica Garbett


In the Finance Act 2016 the Chancellor extended the 10% entrepreneurs’ relief tax rate to investors who are not employees and so would not normally qualify for entrepreneurs’ relief.

Similarly to entrepreneurs’ relief, the investors’ relief reduces the capital gains tax rate to 10% and applies to the first £10m of gains, which is separate from and does not affect the £10m cap of entrepreneurs’ relief. Like entrepreneurs’ relief, there is a minimum time for which the shares need to be held (three years) although that differs from the requirement of entrepreneurs’ relief (one year).

Unlike the entrepreneurs’ relief there is no minimum investment shareholding requirement, but the investor cannot be an officer of the company (subject to limited exceptions).

The relief applies when specific conditions are met with regards to the shares, the investor and the period of investment.

Conditions in relation to shares

The relief applies to shares which are:

  • ordinary shares at issue and immediately before disposal
  • unquoted at the time of issue (AIM shares are considered unquoted)
  • in a trading company or holding company of a trading group throughout ownership by the investor, where trading activities can include preparatory activities in anticipation of trade and to acquire trade
  • subscribed wholly for cash and fully paid at the time of issue
  • held continuously from acquisition to disposal
  • issued for commercial reasons and not solely to secure a tax advantage.

Conditions in relation to investor

The relief applies as long as the investor or a person connected with the investor (the investor’s spouse, civil partner, parent, grandparent, child or grandchild, or other lineal relative, including brothers or sisters) has not been an officer or employee of the issuing company or a connected company in the relevant period (see below).

There are specific concessions available to unremunerated directors and investors who become employees following the share issue:

Unremunerated director

Unremunerated director is not considered a relevant employee and may qualify for the relief if neither he nor any person connected with him had been involved in carrying out a trade or business of the issuing company or company connected with it, before the relevant period (before the shares were subscribed for). This would apply when an unconnected person subscribes for shares in a company, and subsequently happens to become its unremunerated director.

For this purpose, remuneration includes any payment to the director or a person connected with them other than:

  • reimbursement of expenses incurred exclusively and necessarily in the performance of the director’s duties
  • interest on a loan granted by the director to the company at a reasonable commercial rate
  • dividend at no more than a normal return on investment
  • payment for the supply of goods not exceeding market value
  • payment of rent for any property occupied by the issuing company or a related person not exceeding a reasonable and commercial rent
  • payment for qualifying services provided  to the company such as those which are relevant to its UK or partly UK trade, but not of managerial or secretarial nature usually associated with directors. For example, payment for engineering consultancy services provided by a director who is also an engineer would not count as remuneration.

Investor who became employed following the subscription

Usually individuals who became employed after 180 days from subscription will not be considered relevant employees and so can benefit from the relief.

The investment period

The relief applies only to shares:

  • issued and subscribed for on or after 17 March 2016
  • held for at least three years from 6 April 2016.

The relief will therefore apply for disposals from 2019/20.

Operation of the relief

At time of disposal, all or part of the stake disposed may qualify for relief. At time of the disposal there may be three classes of shares being disposed of:

  • qualifying shares, which have been held for three years and entitle the investor to IR
  • potentially qualifying shares, which have been held for less than three years, which do not qualify for IR now, but may qualify in future
  • excluded shares, which do not and will not qualify for IR, for example due to change of trading status of the shares, a receipt of excess return of value, or a corporate reorganisation.

IR is to be claimed in such a way so as to maximise tax relief.

If an individual has had previous disposals, the way to achieve maximum relief in the current year will depend on which shares are treated as having been disposed of in the previous disposals (and therefore which are left to still be disposed of in the current year). How the previous disposal is assumed to have been structured depends on whether or not at the time of the previous disposal the investor claimed IR.

Scenario 1 – IR is claimed at the previous disposal

At time of disposal, an investor had 10,000 excluded, qualifying and potentially qualifying shares each (30,000 shares in total). The investor disposes of 25,000 shares and claims IR. Three years later, the investor makes another disposal, selling the remaining 5,000 shares.

As a result of the claim made with the first disposal, the pot of the disposed shares at that time is assumed to be made of shares in the following order:

  • 10,000 of qualifying shares – these will qualify for the reduced 10% tax rate
  • 10,000 of excluded shares – these will attract the normal CGT rates
  • 5,000 of potentially qualifying shares – these will attract the normal CGT rates.

The next disposal three years later is assumed to be out of the remaining shares, which at the first disposal were potentially qualifying shares, so are likely to be qualifying shares at the time of the future disposal.

The investor benefited from IR claimed on 15,000 shares (10k with the first disposal and 5k with the second disposal)

Scenario 2 – as above, but the investor does not claim IR with on the first disposal

At the second disposal the investor claims IR for the first time. In order to maximise relief, it is assumed that at the previous disposal the pot of the disposed shares was made of shares in the following order:

  • 10,000 of excluded shares
  • 10,000 of potentially qualifying shares
  • 5,000 of qualifying shares.

When the subsequent disposal is made, the shares sold are assumed to be shares which at the previous disposal were qualifying shares. The investors will claim IR on 5,000 shares.

When shares become ‘excluded shares’

Return of value

Anti-avoidance provisions, which disqualify shares from qualifying for IR, apply to any payment by the issuing company to the investor, made one year before share issue and three years after the share issue, excluding:

  • payment of £1000 or less with no prior arrangements in place
  • rent, interest, payment for assets at commercial rates
  • dividend at commercial levels.

Impact of reconstructions on IR

There are special rules applying to new shares issued on reconstructions and takeovers. Whether or not IR will apply to the new shares depends on whether or not there was consideration for the old shares (which includes share consideration). The rules are as follows:

Sale for no consideration

If no consideration is given for the new shares, they are treated as if they were old shares, in that:

  • proportion of qualifying, potentially qualifying and excluded shares is the same as the original holding
  • the subscription price and date is deemed to be the same as the old shares (they are assumed to have been held for the same period as the original shares).

Sale for a consideration

If consideration is given, shares are treated as a new issue with the actual price and subscription date issued.  This will deny IR for the new shares for three years if consideration was in cash.

However, if consideration was for shares (share exchange or scheme of reconstruction), the new holding may qualify for IR if an election is made for those to qualify if the old shares met the qualifying conditions. The effect of the election is that it will crystallise the gain and the relevant IR at that point.

How to claim

The relief is claimed on the capital gains tax pages of your self-assessment tax return. A claim can be made up until the first anniversary of the 31 January following the tax year in which the disposal is made.


The introduction of IR was meant to further enhance a strong entrepreneurial culture in the UK, allowing easier access to financing and business expansion. It will attract investors who to date had to forego any tax breaks unless they qualified for entrepreneurs’, EIS or SEIS relief. The relief is currently available only to incorporated companies (limited liability partnerships are excluded).

However, since its first announcement the relief has been extended to include jointly held shares and trustees; it is possible a further re-write of the qualifying conditions might be seen in future.

Article from ACCA In Practice