Press release: Complexity means new Investors’ Relief only attractive for big investments

The Finance Bill published today includes the legislation for the new Investors’ Relief announced in the Budget. Under the provision, external investors who subscribe for shares in relevant limited companies and then hold them for three years or more will be entitled to a preferential 10 per cent rate of Capital Gains Tax (CGT) on gains up to a lifetime limit of £10 million.

The provisions (in Schedule 14 of the Bill¹) run to 17 pages of dense legislation. Contrary to some earlier assumptions, they are not structured as an extension to CGT Entrepreneurs’ Relief but constitute a stand-alone provision.

President of the ATT, Michael Steed, said:

“We naturally welcome any move to encourage investment by individuals in private limited companies². Following the Budget announcement, we had hoped that the new relief for external investors would provide a simpler route for tax efficient investment by ‘business angels’ than the notoriously complex (but very generous) Enterprise Investment Scheme and Seed Enterprise Investment Scheme provisions. Those schemes offer both Income Tax relief and complete CGT exemption in appropriate circumstances so it is understandable that there are extensive qualifying conditions. By contrast, the new relief offers a favourable CGT rate of 10 per cent rather than an exemption and no Income Tax relief so we had hoped that the qualifying conditions would be straightforward. Those hopes have proved short-lived.

“Far from providing an additional route to Entrepreneurs’ Relief - with which prospective investors and their advisers are relatively familiar – the new Investors’ Relief is structured as a free-standing relief with 17 pages of its own qualifying conditions. As we see it, that will mean that the new relief only comes into its own in relation to relatively large investments where there is sufficient CGT saving at stake to justify detailed consideration of the legislation by specialist professional advisers.

“What we would like to see would be a truly simple scheme that provided a 10 per cent CGT rate where the investment was of a modest nature. In that way, the Exchequer would not be exposed to any significant risk so the qualifying conditions could be reduced to a practical minimum. Structuring such a relief as an extension to Entrepreneurs’ Relief might be a sensible way to do that.”  

Notes for editors

1. Clause 76 introduces Schedule 14 which is found at pages 421 to 439 of the Bill which can be found here.
2. The Explanatory Note published with the Finance Bill explains that the purpose of the new relief in the following terms: “The government wants to create a strong enterprise and investment culture, and ensure that companies can access the capital they need to expand and create jobs. Extending the 10% rate of CGT to external investors in this way will provide a financial incentive for individuals to invest in unlisted trading companies over the long term.” Source: Note 33 on page 205 of the Explanatory Notes which can be found here.