Invest in research before investing in shares

by Donal Bannon

HMRC has published guidance on ‘Investors’ Relief’, which was introduced in Finance Act 2016. Individuals and trustees who qualify can claim reduced CGT rate of 10% on relevant gains, up to an overall limit of £10m. There are numerous conditions to qualify for the relief and it is important to consider the relief from the outset, as many of the conditions need to be met for the whole period of share ownership.

Investors’ Relief applies a reduced rate of capital gains tax to certain share disposals by individuals or trustees.  It does not apply automatically but must be claimed.

The reduced rate is currently 10% and applies to gains within an individual’s lifetime cap which is currently £10 million.  Trustees can claim against the lifetime cap of an individual who is a beneficiary of the trust in certain circumstances.

Shares must be “ordinary” shares in a trading company which are not listed on a stock exchange.  The shares must have been issued on or after 17th March 2016, the date the relief was announced, and must have been held for three years before being disposed of, although shares acquired in certain reorganisations may be treated as having been acquired before the reorganisation.

The relief is intended to encourage and reward new investment so there are conditions to ensure that the shares are subscribed for with new money that benefits the company. The relief is also targeted at external investors so is not usually available where the investor or an individual connected with them is employed by the company. 

Investors’ Relief does not affect the way the gain on a disposal of shares is calculated, but where not all the shares held would qualify for the relief there are rules that identify how much of the gain will qualify for the relief.  Although the relief will not be available for disposals before March 2019, there are also rules that take account of part disposals of shareholdings before that date that are designed to maximise the potential relief available to retained shares.  The rules therefore distinguish between shares that are -

•Qualifying,

•Potentially Qualifying (would qualify but not held yet for 3 years), and

•Excluded (cannot qualify, including shares acquired before 17 March 2016)

Qualifying Share

A share is a qualifying share at the relevant time if -

  1. the individual making the disposal subscribes for the shares that are issued on or after 17 March 2016
  2. the share is an ordinary share from the time it is issued until the point of disposal (the “relevant time”) 
  1. the issuing company is a trading company or the holding company of a trading group when the share was issued and throughout the shareholding period  
  2. the share must be fully paid up for cash at the time of issue  
  3. the company’s shares or securities are not listed on a recognised stock exchange at the time of issue  
  4. the investor (or a person connected with them) is not a relevant employee in respect of the company throughout the shareholding period  
  5. the share must be subscribed for and issued for genuine commercial reasons 
  6. the share must be issued by way of a bargain at arm’s length  
  7. the share must be held by the investor continuously for at least three years from the date of issue or from 6 April 2016 where the shares were issued between 17 March and 5 April 2016.  This is subject to special rules that apply where shares have been issued in a share reorganisation or exchange 

Potentially Qualifying Share

A share is potentially qualifying if conditions at 1 – 8 above are met but the shares have not been held for the minimum holding period of 3 years.

Excluded Share

An excluded share is a share which does not meet the criteria for a qualifying share (conditions 1-8 above) and does not meet the criteria for a potentially qualifying share.  Shares issued before 17th March 2016 will always be excluded shares.  

Transitional Rules

There are transitional rules for shares issued on or after 17 March 2016 but before 6 April 2016.  Any shares issued between 17 March 2016 and 5 April 2016 must be held for a minimum holding period of 3 years starting from 6 April 2016.  

Value received by investor

Where the investor receives significant value from the company, shares will no longer be qualifying shares.

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