Individuals have the option to invest their money through venture capital schemes, designed to help small and medium sized companies grow by attracting investments.
The EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Scheme) are particularly appealing as they offer tax reliefs to individuals who buy and hold new shares of the eligible companies.
Shares must be new, ordinary shares. They must be non-redeemable and have no special rights attached. Investors must pay in full and in cash (not any other assets) to be eligible for Income Tax relief. You cannot use a loan to buy the shares if it was only approved for the purchase of the shares.
Upon receiving a compliance certificate from the company assessing their compliance with the scheme T&Cs, the investments made through these schemes can be claimed for relief for up to five years after the 31st of January following the tax year in which the investment was made.
It should be noted that shares must be held for at least three years and the company must remain EIS-SEIS qualified for at least three years. If these conditions are not met, investors will have to reimburse HMRC for the tax relief received.
- INCOME TAX RELIEF
EIS targets medium-sized start-ups. Individuals can invest up to £1 million per tax year and receive a 30% tax deduction (Income Tax).
SEIS targets start-ups at their very early stages. Individuals can invest up to £150,000 per tax year and receive a 50% tax deduction (Income Tax).
Considering the high risk of investing in early-stage companies, an eventual loss arising from the disposal of the shares acquired through EIS and SEIS funds can be offset against income tax.
For EIS investments, in the case of loss of an entire initial investment of £30,000, the actual loss generated will be £21,000, considering the income tax relief received (£9,000 corresponding to 30% of £30,000). The taxable income for the year you disposed of the share can be reduced by the £21,000 loss resulting in a saving of £4,200 (20% of £21,000) for a basic rate taxpayer.
For SEIS investments, in the case of loss of an entire initial investment of £30,000, the actual loss generated will be £15,000, considering the income tax relief received (50% of £30,000). The taxable income for the year you disposed of the share can be reduced by the £15,000 loss resulting in a saving of £3,000 (20% of £15,000) for a basic rate taxpayer.
- DISPOSAL RELIEF
Investors are entitled to a capital gain tax exemption on any profits arising from the sale of shares acquired through EIS and SEIS investments after holding them for at least three years.
This means that if an initial investment of £30,000 results in the sale of the shares for £50,000, no taxes will be due on the £20,000 profit.
This relief can only be claimed if the income tax relief has already been claimed and not withdrawn by HMRC.
- DEFERRAL/REINVESTMENT RELIEF
Investors can defer the taxation on gains made on disposal of other assets by reinvesting such gains in EIS or SEIS shares over the lifetime of the investment.
This means that if an asset initially bought for £30,000 is sold for £50,000, then the capital gain of £20,000 can be reinvested into an EIS or SEIS scheme to defer the gain.
The deferral will be applied until one of the following occur:
- EIS/SEIS shares have been sold.
- The company ceases to be EIS/SEIS qualified within three years of the investment.
- The investor ceases to be UK resident within three years of the investment.
The deferred gain becomes taxable when it comes back into charge at the applicable rate.
- BUSINESS PROPERTY RELIEF
EIS and SEIS shares are eligible for Business Property Relief (BPR), meaning that the shares held for at least two years at the time of death of the investors can be left to beneficiaries free of inheritance tax.