10% capital gains tax on £20m
As most people involved in business will know, Entrepreneurs' Relief (ER) can, where the conditions are met, reduce the rate of capital gains tax on a sale of shares in a company down to 10% on up to £10m of gain.
Alongside this, there is the new Investor Relief (IR) which also provides for up to £10m of capital gains to be taxed at 10%, again if certain conditions are met. Although gains arising do not qualify for IR until 2019, investment decisions and structures implemented now can have significant impact in later years, when IR becomes effective.
So, is it possible to claim both ER and IR on the sale of shares if the gain is large enough? The answer is yes provided that some thought has been given to the structure when the investment is made.
I will not go into the detail of the various conditions required to qualify for either relief but one of the conditions for ER is that one must be an officer or employee of the company whereas for IR one cannot be a Relevant Employee. This appears to rule out claiming both reliefs in respect of the same transaction. However, this is not necessarily the case as the definition of Relevant Employee for IR does not include an 'unremunerated director'. It is therefore possible to be an unremunerated director which will satisfy both ER and IR tests.
It is important to get the structure right at the outset as if for example someone was appointed a director and took remuneration of £20,000, this would block IR and would cost the individual up to £1m. So the short term gain of remuneration results in long term pain in the form of increased capital gains tax.
However, if properly structured at the outset, the result of this is that up to £20m of capital gains can be taxed at 10% on the same investment.