The then Chancellor George Osborne announced the introduction of investors’ relief at the Budget in 2016. Although separate from business asset disposal relief (BADR), investors’ relief was billed as an extension of BADR and the two capital gains tax (CGT) reliefs are similar in many ways. However, a key point of difference is that BADR is aimed at owners and shareholders who are active in the business, whereas investors’ relief is targeted at external investors.

In its early years, investors’ relief struggled to escape the shadow of BADR. Indeed, familiarity with and interest in the relief was so poor that in late 2020 the Office of Tax Simplification (OTS) recommended its abolition. Having canvassed the opinions of a wide range of people, the OTS reported that “the message was almost unanimous – almost no-one has shown any interest in this relief or is using it”. 

Recent developments suggest that awareness has increased but that a lack of familiarity with the rules, and perhaps confusion with the conditions for claiming BADR, is causing problems. In 2024, HMRC published details of common mistakes made in claims for investors’ relief and launched a one-to-many campaign targeting taxpayers who may have claimed the relief in error. 

In this article we’ll provide an overview of investors’ relief, focusing on some of the potential problem areas most likely to be encountered in practice. All statutory references are to the Taxation of Chargeable Gains Act 1992. 

How relief is given

A claim for investors’ relief may be made by an individual (the investor) who has made a gain on the disposal of a ‘qualifying share’. It is also possible for a person to make a claim in their capacity as a trustee, but this is not considered further here. 

Similar to BADR, investors’ relief applies a reduced rate of CGT to so much of the gain as falls within the investor’s lifetime limit. At the Autumn Budget 2024, the government announced an immediate cut in the lifetime limit from £10m to £1m and successive tax-year increases in the reduced rate of tax as part of a shake-up of CGT rates and reliefs. The rates and amounts of investors’ relief for the current year and future years are shown in the table below.

Despite these changes, investors’ relief remains attractive compared to the higher rate of CGT of 24% applying from 30 October 2024. The rate of tax is the same for BADR and, with effect for disposals made on or after 30 October 2024, the two reliefs now have the same lifetime limit. 

Share reorganisations and the lifetime limit

Where there has been a share reorganisation, such as a share-for-share exchange, the provisions allow for the new shares to take on the history of the old shares and for no disposal to arise at the time of the reorganisation. The shareholder may want to consider making an election (s169VT) to disapply these provisions and trigger a disposal at the time of the reorganisation on which they can claim investors’ relief, noting that this would crystallise a tax liability at a point when no funds have been received to pay it.

Given the reduction in the lifetime allowance, an election may be of interest to those sitting on gains of more than £1m. However, where a reorganisation occurred between 6 April 2023 and 29 October 2024 and a s169VT election is made after that date, legislation in the Finance Bill 2024-25 treats the disposal as occurring on the date that the election was made, and not on the earlier date when the reorganisation occurred. 

Meeting the conditions for claiming relief

Many of the challenges in advising on investors’ relief relate to meeting the conditions for claiming relief. For a share to be a ‘qualifying share’ it must meet the conditions set out in s169VB and escape the disqualification provided for by para1, Sch 7ZB. 

For ease of reference, the conditions may be grouped into two categories.

The tricky employment test

Of all of the conditions that must be met, the employment test is particularly challenging as it looks at not just the investor and the issuing company but at connected parties. Although some exceptions are provided, they are tightly drafted and so it can be easy for mistakes to be made.

The test, as set out above, is that at no point in the shareholding period was the investor, or a person connected with the investor, a relevant employee in respect of the issuing company. Employees may qualify for BADR instead.

For this purpose: 

• section 286 applies to determine if a person is connected with another person. Just looking at family relationships, this means the investor’s spouse or civil partner, the investor and their spouse/civil partner’s relatives and the spouses/civil partners of those relatives. If that’s not difficult enough, there may also be trust and partnership arrangements to consider too; and
• a person who is an officer or employee of the issuing company, or of a connected company, is a relevant employee (s169VW). Broadly, companies are connected if they are under the control of the same person, taking into account the interests of connected persons. 

An exception is made where the person becomes an employee of the issuing or a connected company more than 180 days into the shareholding period provided there was no ‘reasonable prospect’ at the start of the shareholding period that the person would become an employee.

Unremunerated directors

There is also an exception for ‘unremunerated directors’ (s169VX). The rules provide that a director of the issuing company or a connected company is not to be treated as a relevant employee if they did not receive any ‘disqualifying payments’ during the shareholding period from the issuing company or a related person. 

The legislation begins by treating all payments as disqualifying payments and then lists the following categories of payment which are not disqualifying payments, provided they are necessary/reasonable/commercial, as the case may be:

• the payment or reimbursement of travelling or other expenses;
• interest;
• dividends;
• a payment for the supply of goods;
• rent; and
• remuneration paid for ‘qualifying services’ (eg, not secretarial or managerial) provided to the issuing company or a related person in the course of a trade carried on and taxed in the UK.

However, this exception does not apply if the person (or a person connected with them) was connected with the issuing company, or involved in carrying on the trade of the issuing company or a connected company, at any time before the shareholding period.

Disqualification for value received

As noted above, a potential trap to watch out for is the disqualification for value received. The legislation provides a list of circumstances in which the investor receives value from the company, including the repayment of share capital, the making of a loan and the provision of a benefit. As explained by HMRC, the purpose of the disqualification is to ensure that ‘only genuine new investment’ qualifies for investors’ relief (CG63640) and so an exception is provided for ‘replacement value’. 

There is also an exemption for an ‘insignificant’ receipt, defined by HMRC as meaning value that does not exceed £1,000 (CG63643). However, multiple receipts of insignificant value must be aggregated and the disqualification will apply where the total amount exceeds £1,000. 

Confusion with BADR

Given that investors’ relief was introduced as an ‘extension' to BADR, and the similarities with BADR, it is perhaps unsurprising that one is often confused for the other. However, as HMRC points out in its list of common CGT errors (see above), there are important differences, not least when it comes to the qualifying conditions. 

Some of the key differences to be aware of include the following. 

It should also be noted that, although it is not impossible for both BADR and investors’ relief to be available on the disposal of an asset (eg, in circumstances where an exception to the investors’ relief employment test, as explained above, applies), it is unlikely. 

Words of warning

It is important that investors’ relief is not overlooked: following the Autumn Budget 2024 the maximum benefit from claiming investors’ relief in 2025/26 is now £100,000 (£1m taxed at 14% rather than at 24%). However, it is also important to tread carefully when giving advice as it is easy to fall foul of the qualifying conditions, which can mean having to consider the activities of the investor, the issuing company and connected parties over a number of years.

Stephen Relf and Katherine Ford, Technical Managers, Tax, ICAEW