Policy paper

Capital Gains Tax: Entrepreneurs' relief: extension to long-term investors

Published 16 March 2016

Who is likely to be affected

Individuals considering the acquisition by subscription of new shares in unlisted trading companies.

General description of the measure

Entrepreneurs’ relief (ER) will be extended to external investors in unlisted trading companies. This new investors’ relief will apply a 10% rate of Capital Gains Tax (CGT) to gains accruing on the disposal of ordinary shares in an unlisted trading company held by individuals, that were newly issued to the claimant and acquired for new consideration on or after 17 March 2016, and have been held for a period of at least three years starting from 6 April 2016. A person’s qualifying gains for investors’ relief will be subject to a lifetime cap of £10 million.

Policy objective

The government wants to create a strong enterprise and investment culture, and ensure that companies can access the capital they need to expand and create jobs. Extending ER to external investors is intended to provide a financial incentive for individuals to invest in unlisted trading companies over the long term.

Background to the measure

This measure was announced at Budget 2016.

Detailed proposal

Operative date

Investors’ relief will apply to disposals of qualifying shares held for a period of at least three years starting from 6 April 2016 that were acquired on or after 17 March 2016.

Current law

Section 3 of the Taxation of Chargeable Gains Act 1992 (TCGA) provides that individuals pay CGT only on their chargeable gains (net of allowable losses and all other reliefs) that exceed the Annual Exempt Amount (currently £11,100) for the tax year. Shares are assets for the purposes of CGT (section 21 TCGA 1992) and, in the absence of provisions to the contrary, gains on disposals of such assets are chargeable to CGT. Gains on disposals of most shares are presently subject to CGT at a rate of either 18% or 28%, depending on whether an individual is a higher rate tax payer (section 4 of TCGA). Where shares qualify for ER, the first £10 million of gains accrued on the disposal of shares in a trading company by an individual who has worked for the company and owned at least 5% of the ordinary shares in the company, are taxed at a rate of 10% (sections 169H to 169S of TCGA).

Proposed revisions

Legislation in Finance Bill 2016 will amend Part V of TCGA.

The extension to ER, introducing investors’ relief, will apply to gains accruing on the disposal of certain qualifying shares by individuals (other than employees and officers of the company). In order to qualify for relief, a share must:

• be newly issued, having been acquired by the person making the disposal on subscription for new consideration
• be in an unlisted trading company, or unlisted holding company of trading group
• have been issued by the company on or after 17 March 2016 and have been held for a period of three years from 6 April 2016
• have been held continually for a period of three years before disposal

The rate of CGT charged on the qualifying gain will be 10%, with the total amount of gains eligible for investors’ relief subject to a lifetime cap of £10 million per individual. Rules will ensure that this limit applies to beneficiaries of trusts.

Because the relief is designed to attract new capital into companies, avoidance rules set out in the FB16 legislation will ensure that shares must be subscribed for by individuals for genuine commercial purposes and not for tax avoidance purposes.

Summary of impacts

Exchequer impact (£m)

2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021
negligible	+5	-25	-40	-60

These figures are set out in Table 2.1 of Budget 2016 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2016.

Economic impact

Extending ER to long term external investors should support unlisted companies to access the capital they need to expand and create jobs.

The costing accounts for behavioural responses, including greater realisation of gains, and increased incentive to take capital gains relative to income.

Impact on individuals, households and families

Individuals making qualifying investments will be able to access a lower rate of CGT than they would if they had invested in non-qualifying investments.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

It is anticipated that individuals eligible to take advantage of investors’ relief will tend to have higher overall income levels. The introduction of investors’ relief is not expected to adversely impact those groups protected by equality legislation.

Impact on business including civil society organisations

This measure is expected to have no negative impact on business administrative burdens, but companies whose investors are intending to benefit from the measure may incur additional costs related to the issuing of shares. The lower rate of CGT offered by this measure will benefit business, because this will make it more attractive for individuals to make such investments. There is no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

HMRC will need to make changes to its IT systems to implement this change at a cost in the region of £1 million.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be monitored through information collected from tax receipts.

Further advice

If you have any questions about this change, please contact Nick Williams on Telephone: 03000 585660 or email: nicholas.williams@hmrc.gsi.gov.uk