The UK and US – relief for Angel Investors on both sides of the pond
We wrote about the Chancellor’s decision to cut back Entrepreneurs’ Relief in our Budget Summary. Thankfully, Rishi Sunak saw sense and left Investors’ Relief alone. Interestingly, but not surprisingly, the US has its own version of IR in the form of the Qualified Small Business Stock rules. In this brief article we consider the two regimes.
UK Investors’ Relief
Investors’ Relief was introduced in the 2016 Finance Act and subjects capital gains on the sale of qualifying shares to a reduced rate of 10% as with Entrepreneurs’ Relief, up to a lifetime limit of £10 million.
For an individual to claim for Investors’ Relief, the following conditions must be met:
- throughout the entire shareholding period the company must have been trading or have been the holding company of a trading group;
- the shares must not have been listed on a recognised stock exchange at the date of issue; and
- the shares must be ordinary, subscribed for and fully paid in cash, and held for at least three years.
Investors’ Relief can be very appealing for business angels looking to invest in the UK. There are limited exemptions allowing directors and employees to benefit from the relief. Specialist advice, as usual, is required.
Qualified Small Business Stock (QSBS).
An individual who owns QSBS can be exempt from taxation gains on the sale up to $10mn, or 10 times the adjusted basis (in this case the amount of cash plus the fair market value of any property contributed to the corporation in exchange for the stock) of the QSBS disposed – whichever is greater. The gain in excess of this amount is then taxed in the US at 28%.
What qualifies as QSBS?
For stock to qualify as QSBS, it must meet the following conditions:
- the company must be a US entity that is taxed separately from its owners (e.g. C Corporation);
- the stock must be acquired directly by the taxpayer from the company in exchange for money or property (not shares);
- the stock must be issued after August 10 1993; and
- the Fair Market Value (FMV) of the corporation’s total assets must, at all times, have been less than $50mn, until immediately after the individual’s stock has been issued (i.e. the size of the company at the time shares are issued cannot exceed $50mn).
QSBS may be very appealing to UK resident US citizens claiming the remittance basis of taxation. Despite being taxed in the US on their worldwide income and gains, any gain realised will be exempt from US taxation (up to the thresholds) as well as being exempt from UK tax, provided the proceeds are not remitted to the UK.
How can we help?
Investors may not be aware of the tax relief opportunities available to them when making an investment, or in some cases even after they have disposed of their interest. At this point the sun may have set on the window of opportunity to make a claim for relief. We can advise on what reliefs may be available to you both before you make your investment and after.