Investors’ Relief under pressure – Why HMRC is tightening its approach

HM Revenue & Customs (HMRC) is writing to taxpayers who claimed Investors’ Relief on their 2023/24 Income Tax Self-Assessment returns but may not meet the strict eligibility criteria.

These letters signal increased enforcement around a lesser-used Capital Gains Tax (CGT) relief that is frequently misunderstood.

What is Investors’ Relief?

Introduced in 2016, Investors’ Relief offers a reduced CGT rate of 14 per cent (for disposals made on or after 6 April 2025) on qualifying gains when individuals dispose of ordinary shares in unlisted trading companies.

To qualify, the shares must have been newly issued and subscribed for in cash, held for at least three years, and not linked to employment or a directorship, except in narrow circumstances.

It is intended to encourage long-term investment by external investors in trading businesses and remains distinct from Business Asset Disposal Relief.

The lifetime gains limit for Investors’ Relief is now £1 million, applying to disposals made on or after 30 October 2024.

What is HMRC challenging?

HMRC has identified numerous 2023/24 Self-Assessment returns where Investors’ Relief was claimed without sufficient evidence or where eligibility is unclear.

Two types of letters are now being issued:

• Eligibility warning – The taxpayer is asked to re-check the relief conditions. If the claim is found to be invalid, an amendment should be submitted. If valid, HMRC expects the taxpayer to confirm this.
• Insufficient information – In some cases, the return did not include enough detail for HMRC to assess the claim. Taxpayers are asked either to amend the return or provide the missing information, such as acquisition and disposal dates, subscription details, and the investor’s relationship to the company.

Consequences of inaction

Taxpayers have 30 days from the date of the letter to respond. After that, HMRC may amend the return or initiate a formal compliance check.

Any CGT underpaid as a result of an invalid claim will attract interest and penalties, with the letter constituting a “prompted disclosure”, potentially increasing the penalty range.

Common misconceptions leading to invalid claims

Many taxpayers assume they can claim Investors’ Relief simply by holding shares in a trading company for three years.

In reality, the rules are more detailed than they first appear, and errors are surprisingly common.

Business owners attracting outside investment, as well as individuals backing start-ups or unlisted companies, need a clear understanding of how the relief applies, well before making assumptions in a tax return.

Make sure your claim holds up

If you or your business has claimed Investors’ Relief in a recent return, or are planning to rely on it in future, this is the right moment to review your position.

We can help assess whether your claim meets HMRC’s requirements and ensure any disclosures are handled correctly.

Contact us if you have received a letter, are unsure about your eligibility, or want to discuss planning future investments with tax efficiency in mind.