How Does Investors’ Relief Operate in England?

If you are an unlisted company shareholder and want to sell your shares, you will likely have to pay capital gains on a portion of the transaction price. This is because shares are a capital asset; you make a capital gain when you sell a capital asset for more than you paid for it. For individuals, capital gains attract a capital gains tax. However, you may be able to minimise your tax liability for capital gains arising from the sale of shares if you qualify for Investors’ Relief. This article will explain what this is and how you might qualify as a company shareholder. 

Investors’ Relief 

In 2016, a new law arose to encourage investors to buy into unlisted companies and help them grow. Investors’ Relief is a part of this, where the seller only pays the lower capital gains tax rate for certain qualifying transactions involving the sale of shares in unlisted companies. Currently, the lower rate is 10%. 

An Example 

Imagine you are a silent investor in a startup company. You provide £10,000 in exchange for 20% of the shares in the company. Five years later, the company has grown substantially, and you find a buyer prepared to pay you £20,000 for your shares. 

If you sell the shares for this price, you will have made a gain of £10,000. In this scenario, the capital gains taxation for individuals allows you to make additional deductions for:

• incidental costs in buying or selling the shares, such as legal fees and brokerage fees; and 
• money spent defending the title to the shares (although this is unlikely to be an issue here).

Therefore, if you spent £500 on legal fees buying the shares and £1,000 in legal and brokerage costs selling them, the taxable gain on the sale of shares is £8,500 (£10,000 less £500 less £1,000). If you make more than £50,270 annually, you will pay 20% on £8,500. This amounts to £1,700, meaning you would only pocket £6,800 in gains. 

However, if you qualify for Investors’ Relief, you would only have to pay £870, meaning you get to keep £7,640. 

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Qualifying for Investors’ Relief

Only individuals can qualify for this, so whilst you may be able to, your company cannot.

Types of Shares

To qualify for Investors’ Relief, you must own ordinary shares in the company, so not preference shares that do not give you the right to vote at shareholder meetings or shares through written shareholder resolutions. 

You must fully pay the shares to their nominal value. So, if you were issued £10,000 shares and the shares had a nominal value of £1 each, you must have paid the company £10,000 by the time you sell the shares. 

Type of Company 

The company you own shares in must not be listed on the stock exchange, so likely a private company. It must also be a trading company rather than a company whose primary business is investing in other companies. 

However, if you own shares in a holding company, and the holding company sells its shares in another company, you may qualify for Investors’ Relief. 

Length of Ownership 

When you sell the shares, you must have owned them for at least three years. 

Relationship to the Company 

You cannot be an officer of the company or an employee of the company to qualify for Investors’ Relief. 

An officer is either a:

• director; or 
• company secretary. 

Likewise, if you receive any salary or work on behalf of the company, you will likely be considered an employee of the company and, therefore, not qualify. If you are an employee or officer of the company, you may qualify for Business Asset Disposal Relief, which has the same effect of reducing the rate charged on your taxable gains to 10%.  

Lifetime Allowance

Provided you meet all the conditions, you will qualify for Investors’ Relief on the chargeable gains arising from the disposal of shares in the company. 

Each individual can claim up to £19m under Investors’ Relief throughout their life. If your chargeable gains exceed £19m, you may have to pay 20% capital gains tax on any subsequent gains from selling the company shares. 

Key Takeaways 

If you own shares in a company and are not a director or employee in the company, you may qualify for Investors’ Relief when you sell shares in the company. This means you pay 10% in taxes on the taxable gains, and you can claim up to £19m under Investors’ Relief throughout your life. However, to qualify, you must have fully paid for the shares in the company, and the company must not be listed on a stock exchange. You must have also owned the shares for at least three years before you sell them. Investors’ Relief is only available to individuals, so is not available to companies.

If you need help with how Investors’ Relief operates, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today or visit our membership page.

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