As a tax professional advising entrepreneurial businesses, one of the main subjects which repeatedly makes my phone ring, or sets off my email ping, is that of Entrepreneur’s Relief (ER).
This isn’t surprising, as this is one of the most valuable tax reliefs potentially available to entrepreneurs at the time they realise the value of the businesses they might have spent many years creating, and risked everything for. So a large part of my professional work, and that of my team at Armstrong Watson, centres around helping clients to benefit from and preserve this very important tax relief.
Entrepreneur’s Relief provides a reduced tax rate of 10% for individuals who dispose of an interest in the business they have worked in. The rules are quite complex, easy to fall outside of inadvertently and have also changed quite a bit in recent years.
I will provide an update on these changes and highlight some of the traps in future articles, however this article will highlight the existence of Investors’ Relief (IR), which might be regarded as the “younger sibling” of Entrepreneur’s Relief.
Investors Relief
Investors’ Relief, like ER, provides a reduced tax rate of 10% on up to £10m of gains in a person’s lifetime and only applies to the disposal of business assets, and specifically to shares in a trading company. However, unlike Entrepreneur’s Relief, IR is aimed at individuals who are not working in the business— at least at the time they acquire the shares. It is possible to become involved later on and, in fact, it is possible within the IR rules to be an unremunerated Director, which might be important.
Investors’ Relief is available in respect of qualifying shares issued on or after 17th March 2016 and held for a minimum of two years, and so we will now potentially be seeing the first Investors’ Relief qualifying gains being made.
It is indeed possible for an individual to benefit from both reliefs in his or her lifetime and for those successful enough to make sufficient gains to use both reliefs, there is a maximum lifetime benefit of £2m of tax saving. This benefit can be multiplied in a family setting if the values are large enough and circumstances permit.
IR is often not thought about when business ownership structures are considered. It is a potentially useful relief in the context of new investment and start-ups, especially where ER might not be available—perhaps because the investor is not going to be involved in the management of the business, or perhaps has used up his or her lifetime ER limit or wishes to preserve it for use elsewhere.
If you’d like to learn more about eligibility for IR or ER please get in touch with Jim Meakin on 07966468517 or email at jim.meakin@armstrongwatson.co.uk.
