Mark McLaughlin highlights a relatively unknown and infrequently used but generous capital gains tax relief.
Some company shareholders may either be unaware or have forgotten about a relatively unknown capital gains tax (CGT) relief that offers a reduced CGT rate of only 10% on qualifying gains of up to £10m during their lifetime, if certain conditions are satisfied.
Investors’ relief (IR) applies to disposals of shares in trading companies by individuals (or trustees in some cases). Unsurprisingly for such a generous relief, there are potentially tricky ‘strings’ attached. Detailed commentary on the IR rules is beyond the scope of this article, but some key conditions are outlined below.
Jumping the hurdles
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Ordinary shares in an unlisted (i.e., unquoted) trading company (or holding company of a trading group) must have been ‘subscribed for’ in cash by the person making the disposal and have been fully paid up when issued.
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The shares must have been subscribed for and issued for genuine commercial reasons.
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The shares must be continuously held for at least three years between the shares being issued and the disposal (NB special rules apply to company reorganisations, which are beyond the scope of this article).
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As a general rule, the investor (or a connected person) cannot be a relevant employee of the company at any time in the ‘share-holding period’, i.e., broadly the period between the acquisition and disposal of the shares (separate rules apply to trustees of a settlement in some cases, which are not considered here).
A ‘relevant employee’ is broadly someone who has been an officer or employee of the issuing company (or connected company) at any time in the ‘relevant period’ (i.e., the share-holding period). However, there are two exceptions to this general rule:
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An ‘unremunerated director’ of the issuing company (or a connected company), where they (or a connected person) prior to the relevant period have not been connected with the issuing company or involved in carrying on the whole or any part of the trade, business or profession carried on by the issuing company (or connected company);
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If someone becomes an employee (not a director) of the issuing company (or a connected company) more than 180 days after the commencement of the relevant period where, at the beginning of the relevant period, there was no reasonable prospect that the person would become an employee.
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If an investor subscribes for shares eligible for IR but receives value (other than insignificant value) from the company within a ‘period of restriction’ (i.e., one year before to three years after the shares are issued), the shares are generally treated as being excluded. ‘Value’ is widely defined (see HM Revenue and Customs’ (HMRC’s) Capital Gains Manual at CG63641) and can include payments of excessive remuneration or abnormal dividends.
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The shares must have been issued on or after 17 March 2016, and disposed of on or after 6 April 2019.
HMRC confirms (at CG63560) that spouses (and civil partners) are taxed independently and may each make a claim. Each is entitled to claim IR on gains up to the £10m lifetime cap, provided they each satisfy the relevant conditions for relief.
Practical tip
Check the rules carefully before claiming IR, to ensure all the relief conditions are satisfied, and consider providing additional information in the ‘white space’ of the tax return, if necessary, to reduce the risk of challenge by HMRC.
