CGT Investors’ Relief

A client has recently sold his family company, realising a significant gain and using all of his Capital Gains (CGT) Tax Entrepreneurs’ Relief lifetime allowance in the process.Although he has stepped back from active involvement, he is considering investing a significant amount of money in a trading company and has told me he would like to ensure that he benefits from a 10% CGT rate when he sells this. Is this possible?

CGT investors’ relief, introduced in Finance Act 2016, allows for a separate, additional £10 million of lifetime allowance on the sale of qualifying shares in a trading company. The rules are somewhat complex, but potentially provide a favourable rate of CGT for an investment that may not, for instance, qualify for the various tax incentives under EIS/SEIS or Entrepreneurs’ Relief.

The relief applies to ordinary shares subscribed for on or after 17 March 2016, in an unquoted trading company or holding company of a trading group, where the shares are held for a minimum 3-year period prior to disposal.

The relief will generally not apply if either the investor or someone connected to them is either an officer or employee of the company invested in, or another company connected to it (the ‘relevant employee’ restriction).

That said, it is possible for an unremunerated director of the company invested in to avoid the ‘relevant employee’ restriction if, prior to making the investment, neither they nor any person connected to them were either connected to the company or involved in the carrying on of its trade.

Furthermore, an unremunerated director would be able to receive dividends, interest (arising on a loan to the company) and a reimbursement of business expenses from the company without breaching this condition.

In addition, it might be possible for trustees to claim relief if a qualifying life tenant met these requirements.

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