Investors’ Relief: updated guide to rules, CGT rates and eligibility

Investors’ Relief offers an opportunity to reduce capital gains tax (CGT) when investing in unlisted trading companies. However, navigating the rules, including the changes announced in the Autumn Budget 2024, and meeting the qualifying conditions can be challenging.

What is Investors’ Relief?

Investors’ Relief provides a reduced CGT rate on qualifying disposals of ordinary shares in unlisted trading companies. The relief is available to both individuals and trustees where qualifying conditions are met.

Investors’ Relief is intended to encourage new investment over the medium to long term. To qualify, the ordinary shares must be newly issued at the time of acquisition, subscribed for and fully paid with new cash that benefits the company and held for at least three years. The relief is targeted at external investors so will not usually be available where the investor, or an individual connected with them, is an officer or employee of the company.

Changes to lifetime limits and CGT rates

CGT on qualifying disposals is charged at 18% for disposals on or after 6 April 2026, and 14% for disposals in the 2025-26 tax year (having previously been 10%).

The lifetime limit for qualifying gains is £1 million (£10 million before 30 October 2024).

Anti-forestalling rules for Investors’ Relief

Anti‑forestalling rules can apply to stop taxpayers locking in the more beneficial previous Investors Relief rates and lifetime limits that applied prior to the Budget announcement on 30 October 2024 through the use of unconditional contracts or certain share reorganisations entered into prior to 30 October 2024.

Investors’ Relief qualifying conditions

Key conditions include:

• The shares must be new ordinary shares, unquoted and acquired by subscription,
• The shares must be subscribed for wholly in cash and fully paid up at issue,
• The shares must be subscribed for and issued by way of a bargain at arm’s length, for genuine commercial reasons, and not as part of arrangements where one of the main purposes is to secure a tax advantage,
• The company must be a trading company or holding company of a trading group throughout the ownership period:
  • The legislation defines a trading company as one which is ‘carrying on trading activities whose activities do not include, to a substantial extent, activities other than trading activities’,
  • Activities other than trading activities will include any investment-related activities such as property businesses and investment portfolios, and
  • For many years HM Revenue & Customs (HMRC) considered a ‘substantial extent’ to mean ‘more than 20%’. In practice, the 20% test was applied to various criteria such as turnover, asset base, management time and expenditure. Recent case law has suggested that this 20% rule of thumb is incorrect however, and thus the position of businesses that include non-trading activities is unclear. Businesses carrying on non-trading or investment activities will need to carefully examine the facts, circumstances and quantum of their activities in order to determine whether Investors Relief would be available.
• The investor, or a person connected with them, must not be an officer (eg director or company secretary) or employee of the company, or a connected company, at any time in the ownership period (subject to very limited exceptions, eg where the investor becomes an unremunerated director after subscribing for their shares),
• The shares must be held continuously from subscription to disposal for at least three years, and
• Investors’ Relief isn’t available if the investor (or an associate) receives more than insignificant value from the company (or a person connected with the company) in the period from one year before the shares are issued to immediately before the third anniversary of the issue date. The rules are wide-ranging and so any amounts intended to be paid by the company to the investor should be carefully checked to ensure they do not fall within these value received rules.

Where only part of a disposal qualifies for the relief, the gain is apportioned accordingly.

Investors’ relief identification rules and claims process

Special identification rules apply so that qualifying shares are matched first where possible, preserving the relief for future disposals. These rules are detailed and require careful attention.

For disposals by trustees there must be at least one eligible beneficiary with an interest in possession including the shares for the full three-year period ending with the date of the disposal. The beneficiary must not have been a relevant employee. Any gains qualifying for the relief will use that beneficiary’s lifetime limit and a joint election must be made between the trustees and the eligible beneficiary to claim the relief.

A claim for Investors’ Relief must be submitted within 12 months of 31 January following the end of the tax year in which the disposal takes place.

How Investors’ Relief interacts with BADR

Investors’ Relief operates separately from Business Asset Disposal Relief (BADR), although the same CGT rates apply to both reliefs.

Each relief has its own £1 million lifetime limit.

As BADR has a requirement for the investor to be an officer or employee, the circumstances in which both reliefs can apply to the same individual are limited, such as where an investor later becomes an unremunerated director, and therefore unlikely to apply often in practice.

Unlike BADR there is no minimum shareholding requirement for Investors’ Relief, but other qualifying conditions apply. It is important to review the availability of both reliefs in advance to determine the most effective structure.

For example, if an investor becomes a non-executive director (NED) of a company after their investment is made and it’s possible to structure the NED role so that the investor is not entitled to any payment for the provision of NED services, then it might be possible for the investor to claim the reduced rate of CGT up to £2 million under both Investors’ Relief and BADR.

How Investors’ Relief compares with EIS and SEIS

Investors’ Relief, the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) all seek to encourage individuals to invest capital in growing companies, but do so in different ways. EIS and SEIS are primarily concerned with directing capital into early‑stage, higher‑risk companies and therefore generally offer more generous tax reliefs, including the possibility of complete CGT exemption on the disposal of qualifying shares. By contrast, Investors’ Relief is not designed to target capital towards a particular subset of companies, but to reward committed equity ownership. Because the upfront criteria are similar, eg subscription for new ordinary shares wholly in cash and fully paid up at the date of issue, Investors’ Relief may be available where an investment fails to meet ongoing EIS or SEIS conditions or does not qualify from the outset.

Professional advice and support

Despite the reduced lifetime allowance and the increased CGT rates, Investors’ Relief remains a valuable tax break for external investors in unlisted trading companies. We can help you understand the rules, assess eligibility, structure investments appropriately and regularly monitor compliance.

For advice regarding any of the issues raised here, please get in touch with Sean Watts.