Investors are generally familiar with the tax advantages of ISAs and pensions. However, many are unaware of a number of government schemes available to encourage investment into small businesses.
These schemes can often result in valuable tax breaks for investors, meaning they may have a place in your investment portfolio, but they are only suitable for experienced investors who can accept significant amounts of risk, and will depend on your individual circumstances. We recommend that you seek advice from a qualified financial and tax advisor before investing.
INCOME TAX RELIEF
Subject to various conditions, investors may obtain income tax relief at 30% (for EIS) and 50% (for SEIS) (subject to the maximum annual investment for each scheme). Although, please note that the income tax relief is withdrawn if these shares are disposed of within three years. Income tax relief can only be claimed if you have a sufficient income tax liability.
Eligibility for income tax relief is restricted to companies with which you are not connected at any time during a period beginning two years before the issue of shares and ending three years after that date, or three years from the commencement of the trade if later.
CARRY BACK RELIEF
There is a “carry back” facility where part or all of the qualifying investment can be treated as being invested in the preceding year.
Should your EIS or SEIS investment make a loss, it may be possible to apply for loss relief. The amount of the loss is restricted by the amount of the income tax relief still attributable to the shares disposed of. An EIS or SEIS investor may be able to claim loss relief on the net cost of the investment. This is to say, loss relief can be claimed on the initial investment less the income tax relief at the tax payer’s higher marginal rate.
For example, an investment of £100,000 into SEIS is made, and the investment is unsuccessful rendering the investment worthless. Initially, £50,000 of income tax relief can be claimed. Loss relief is claimed on the net cost of the investment in this case it would be £50,000, of which 45% can be claimed (assuming a top rate tax payer). Therefore, the loss relief one could claim would be £22,500 in this example.
CAPITAL GAINS TAX (CGT) DEFERRAL (EIS)
CGT is normally charged when certain capital (or ‘chargeable’) assets are sold at a profit. However, deferral relief means it is possible to defer a CGT payment on gains arising on disposals of any assets where these gains are reinvested in new shares in an EIS company. The chargeable CGT is deferred for the life of the investment. You can defer gains made in the 36 months prior to your investment or 12 months after.
RE-INVESTMENT RELIEF (SEIS)
There is also an additional exemption where assets are disposed of at a gain in that year and funds equal to the amount of the gain are invested in SEIS shares. Reinvestment relief is available at 50% of the matched gain where the proceeds are invested in SEIS shares.
INHERITANCE TAX (IHT) EXEMPTION
Business Relief (BR) is a key relief which can reduce the value of IHT charged. Traditional gifting strategies often require the individual to survive the gift by seven years before it becomes fully exempt from IHT. However, a Business Relief (BR) investment is IHT exempt after a minimum period of two years, making it an attractive option for many individuals. In addition, there is no requirement that the holder of the shares should be involved in any way in the running of the business or the company. This can provide a way for family members who have funds to be involved in financing the company and to be able to pass on shares free of IHT.