The amendments to the Finance Bill 2016-17 announced on 13 June 2016 extend the scope of Investors’ Relief (IR) to allow investors who become unpaid directors and in addition certain paid employees to potentially qualify for IR. For employees, as long as when the individual made the share subscription they were not intending to become an employee and employment starts at least 180 days after acquiring the shares, then IR could be available. The Government’s intention is that this relaxation of the officer or employee rule will allow business angels to become more closely involved with the growth and development of the company into which they have invested. These amendments also allow trustees of a settlement and shares jointly subscribed for by two or more individuals to benefit from IR.
As highlighted in our March 2016 commentary on the draft Bill, IR applies to external investors in unlisted trading companies (or holding companies of trading groups), for newly issued ordinary shares acquired for consideration on or after 17 March 2016. The investment must be held for at least three years from 6 April 2016. A £10 million lifetime IR cap will apply in addition to the lifetime Entrepreneurs’ Relief (ER) allowance.
The amendments to the Bill are to ensure that certain officers and employees are able to benefit from IR.
Generally a person who is an officer or employee of the issuing company or connected company is unable to qualify for IR. However the amendments to the Bill announced on 13 June 2016 ensure that this exclusion does not apply if the individual is a ‘relevant employee’. A ‘relevant employee’ is one who becomes an unremunerated director of the company, or a connected company, following the subscription of qualifying shares. An unremunerated director must never have been previously involved with the issuing company and must not have previously received disqualifying payments. This provision is intended to be aimed at business angels who may work closely with a company after their investment. In addition, an individual who subsequently becomes an employee of the company 180 days after the shares are issued, where there was no reasonable prospect the individual would become an employee at the time of the share issues, is also a ‘relevant employee’.
Trusts and joint ownership
With respect to trusts, the amount of IR available is attributed to and deducted from a qualifying beneficiary’s own individual lifetime limit of £10 million in a similar way to ER. A qualifying beneficiary is one who has an interest in possession in the relevant shares immediately before the disposal and had such an interest in the three years ending with the date of disposal. The provisions will not apply if the individual has been a ‘relevant employee’ in this time period and the individual must elect to be treated as an eligible beneficiary in respect of the disposal.
For joint holdings of shares, in order to qualify for IR the shares must be of the same class and meet all the other qualifying conditions.
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