Difference Between Entrepreneurs' Relief And Investors' Relief

It is quite easy to get confused between Entrepreneurs’ Relief and Investors’ Relief (IR). Simply put, both are tax reliefs and can potentially cost you a huge sum of money if you slip up on them. Irrespective of how easy they are to do, there lies a number of pitfalls if they are not carried out properly. In addition to that, even though both have the same lifetime limits and Capital Gains Tax (CGT) rates, entrepreneurs’ relief and investors’ relief are distinct reliefs that come with their own rules.

Therefore, in this post, we will understand the basic difference between entrepreneurs’ relief and investors’ relief. For the ease of comprehension, we’ll call them ER and IR.

Subscription of Shares

According to the norms, IR requires the qualifying shares to be subscribed for, as opposed to ER, where there is no such requirement. For ER purposes, you can simply buy the shares from another shareholder, and whether or not the shares were issued before, on or after March 17th, 2016, is irrelevant. On the contrary, for IR purposes, the qualifying shares must have been issued at a date on or after March 17th, 2016.

Holding Period Between Shares

According to the IR rules, you typically need a holding period between shares being issued and disposed of for a minimum of three years. If the shares had been issued between March 17th, 2016 and April 5th, 2016, the period could be slightly longer. On the other hand, according to the ER norms, shares typically must be owned by an individual for the complete minimum duration of at least two years (one year prior to 6 April 2019) before the date of disposal. That said, you might need a more extended period of ownership to attain ER if a company has ceased trading. 

Employee or Office Holder

As per the norms of IR, investors are discouraged from being either employees or officers of the company that is issuing the shares. In the same vein, they can also not be employees or officers of any connected company. According to the general rule, the investor must not be the company’s relevant employee at any moment of the shareholding period. A relevant employee refers to an individual who has been an employee or an officer of the issuing company or a connected company of the issuing company at any moment in the shareholding period. The rules for ER are just the opposite. ER norms require that an individual must be or have been an employee or office holder of the issuing company for the minimum of 2-year qualifying period that ends before disposal.

Type of Company

IR needs that the issuing company is a trading company or a trading group’s holding company throughout the period of ownership of the shares. On the contrary, ER only needs the company to have been a trading company or a trading group’s holding company for the previous two years wherein the shares are held.

Minimum Share Percentage to Be Owned

ER will be available to a shareholder only if he/she owns at least 5% (except for EMI shares, where there is no minimum holding required) of the company’s ordinary shares. By virtue of this, the shareholder will also possess a minimum of 5% of the votes. For IR, there exists no minimum requirement.

Listed Companies

For IR, the shares must not, at the date of issue, be listed on a recognised stock exchange. For this purpose, shares listed on the alternative investment market (AIM) are regarded as ‘unlisted’. ER is available for listed stocks, provided the qualifying conditions are met.

Lifetime Limit

There is a cap of ￡10 million for each of the relief.

To get things right, here is a comparison table to help simplify things for you!

Parting Words

Therefore, as is evident, on the most superficial level, you might think that entrepreneurs’ relief is the same as investors’ relief, but in reality, they are quite different from each other. If you are someone who is working with more than one share classes that have different nominal values, it can be really easy to make a mistake. Therefore, wherever possible, it is advised that you work with a qualified lawyer who is well-versed with both entrepreneurs’ relief and investors’ relief.

The importance of both entrepreneurs’ relief and investors’ relief cannot be denied even though these are not the precise reasons why people choose to become entrepreneurs. Simply remember to look out for all the traps and complexities that might ensnare you if you are not careful And ALWAYS seek expert advice. To discuss further get in touch with us.