Angel investors can now benefit from Entrepreneurs’ Relief

by Startacus Admin

Changes to Entrepreneurs’ Relief announced in Osborne’s recent Budget may mean angel investors now have a greater incentive to invest in early stage startups in the UK. Over to Chris Conway, MD of Accounts and Legal to explain...

British startups may have a new best friend, and believe it or not his name is George Osborne.

That’s because the changes to Entrepreneurs’ Relief announced in Osborne’s recent Budget mean angel investors now have a much greater incentive to invest in early stage startups in the UK. In fact, George’s 2016 update to this eight-year-old tax relief is expected to help make up to £1 billion of additional growth capital available to unlisted companies.

The Chancellor’s decision to extend Entrepreneurs’ Relief beyond company founders and employees for the first time, to encompass the external, long-term investors that can also play a crucial role in a startup’s success, is intended to help “create a strong enterprise and investment culture, and ensure that companies can access the capital they need to expand and create jobs”.

Unsurprisingly, the UK Business Angels Association, the national trade association for angel and early stage investors in the UK, was delighted with Osborne’s announcement. The UKBAA has campaigned for many years to have the vital role of business angels recognised (and rewarded) through the extension of Entrepreneurs’ Relief to long-term investors. 

Angel investors represent an invaluable source of seed funding for early-stage ventures, and played a particularly important role during the credit crunch and subsequent recession, when banks cut small business-lending in order to shore up their own capital reserves.

The changes to this tax relief mean angel investors (and other private investors, too) will no longer require a 5 per cent shareholding or have to be an employee or director of the company in order to qualify for Entrepreneurs’ Relief, provided their shareholding consists of newly issued shares with full voting rights and they hold their stake for at least three years.

Under the new rules, any capital gains realised from the sale of such a long-term shareholding in an unlisted company will benefit from Entrepreneurs’ Relief, taking the investor’s rate of Capital Gains Tax from the current (recently lowered) rate of 20 per cent for higher rate taxpayers, down to just 10 per cent. However, the relief does come with a lifetime limit of £10 million, after which the investor would pay the normal rate of Capital Gains Tax.

Prior to these changes an individual only qualified for Entrepreneurs’ Relief if they owned at least 5 per cent of a company’s voting shares and were also an officer (ie director) or employee of the company.

Leading players in Britain’s crowdfunding sector have hailed the importance of Osborne’s decision for Britain’s growing number of early stage startups, with Jeff Lynn, founder of the crowdfunding platform, Seedrs, saying: “The slashing of capital gains tax rates and entrepreneurs’ relief being extended at 10 per cent to long-term external investors…further reinforces the growing appeal of small business investing”.

During his Budget speech George Osborne claimed his reforms to CGT and Entrepreneurs’ Relief would “put rocket boosters on the backs of enterprise and productive investment”. While his choice of language certainly carries an element of hyperbole, by recognising the important role played by angel investors, crowdfunders and other private investors Osborne really has made himself a better friend to British startups.

Written by Chris Conway

Chris Conway is the MD of Accounts and Legal a leading Small Business Accountancy firm based in London who offer accounting, tax and employment law advice and services.

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Published on: 1st May 2016