Entrepreneurs' Relief was initially introduced to encourage entrepreneurs to invest in certain UK companies by allowing them to pay 10% capital gains tax (CGT, rather 20% as usual) on any gain on a future sale, provided certain conditions were met.
The principal requirements of Entrepreneurs' Relief are that, for 24 months before the sale:
- the company was a trading company or a holding company of a trading group; and
- the taxpayer was an employee or director of the company or of a group company, and had at least 5% of the ordinary voting share capital of the company, which entitled them to at least 5% of the sale/liquidation proceeds of the company.
The lifetime limit for Entrepreneurs' Relief was previously £10 million of gains. However, since the Budget on 11 March 2020, this has been reduced to £1 million, effectively reducing the maximum saving by £900,000.
However, all is not lost for those investors who can instead claim Investors' Relief. This relief has strict conditions, but where met, the taxpayer can still benefit from the reduced 10% CGT rate on gains capped at the full £10 million allowance.
For Investors' Relief to apply, the requirements are broadly as follows:
- the shares must be fully paid ordinary shares issued for cash and held for at least three years before sale;
- the company must have been an unlisted trading company (or holding company of a trading group) since the shares were issued;
- the shareholder, and all persons connected to them, must not be a "relevant employee"; and
- the shareholder must not have "received value" from the shares or company for a certain period.
Whilst the relief is specifically aimed at passive investors, it offers a significant tax advantage.
Conversely, other options may also be available for those standing to make losses rather than gain. For example, if shares fall in value so much that they effectively become worthless, the investor can crystallise their loss by making a "negligible value claim", provided certain conditions are met. In certain circumstances the investor can claim income tax relief for the capital loss.