Tax breaks to encourage fund raising for smaller unlisted UK companies needs a boost
Usage of a tax break designed to encourage UK investors to fund unlisted companies seems to be falling out of favour says business advisors and chartered accountants Lubbock Fine. The value of Investors Relief claims fell 18% in the last year to £242m from £294m in the previous twelve months, shows new data provided by HMRC to Lubbock Fine.
Data just out from HMRC also shows that the amount of money raised through the EIS scheme for small companies has fallen by 20% in the last year from £1.97bn to £1.58bn (year ending April 5, 2024).
Similarly, Lubbock Fine point out that the amount of money raised by VCTs has fallen by 17% in the last year from £1.05bn to £873m in the most recent year (year ending April 5, 2024).
Investors Relief is claimed by private investors when they sell shares that they bought in a company that is not listed on a stock exchange. After they have held the shares for three years they benefit from a lower capital Gains Tax (CGT) rate of 10% on the disposal, instead of the typical CGT rate of 24% (or 18% depending on income).
The tax break is designed to encourage people to fund higher risk UK growth companies. Without tax breaks it is hard to attract UK investors to fund smaller companies because of the higher risk of insolvency amongst small companies.
The number of claims for Investors Relief fell 22% to 1,100 in 2022/23, down from 1,410 in 2021/2.
David Portman, tax partner at Lubbock Fine says that Investors Relief has the potential for becoming a more useful tool in attracting investment in unlisted businesses that aren’t eligible for the EIS scheme. Companies that are older than seven years old or have gross assets of over £15m are ineligible for the EIS investment scheme.
The number of investors investing in small UK businesses because of Investors Relief claims could continue to fall as the government has decided to reduce the attractiveness of the tax break. CGT rates for individuals claiming Investors Relief rose to 14% on April 6 2025 and will rise further still to 18% on April 6 2026.
David adds that the government needs to encourage more investment into small businesses to help achieve its “growth agenda” – as opposed to chipping away at the attractiveness of tax breaks relating to small company investments.
David, continues: “Making Investors Relief less attractive will negatively impact the flow of investment into growth companies. That means less job creation and growth from UK entrepreneurs.”
David points out that that the Autumn Budget also reduced the IHT tax breaks related to investing in AIM shares. Data from HMRC also show that the amount of money being raised for small businesses through the EIS scheme also fell in the most recent year.
Adds David: “Overall investment in unlisted, growth companies in the UK seems to be heading in the wrong direction. Their needs to be a push to promote these schemes by the government as Investors Relief could be an important conduit to getting funding into smaller businesses.”
“HMRC themselves suggest that many taxpayers are confused over whether they can claim Investors Relief and on what shares, which leads them to reject some claims – which does suggest the need for more education.”
Investors Relief claims fall in the last three years
