From 2012/13 the Government has launched a new tax-efficient venture capital scheme to encourage the raising of equity finance in smaller start-up companies known as the Seed Enterprise Investment Scheme (SEIS).
A range of generous tax reliefs are available to individual investors who invest in qualifying SEIS companies.
The Tax Reliefs
Taxpayers who invest up to £100,000 in a qualifying new start-up company will be eligible for income tax relief of 50% on the amount invested, irrespective of the rate at which an individual investor pays tax. The relief is given via a reduction in an individual’s tax liability provided there is a sufficient liability against which to set it.
As well as the income tax benefits, two capital gains tax (CGT) reliefs are also available:
- Any capital gains arising during the 2012/13 tax year and reinvested in a qualifying SEIS during 2012/13 or 2013/14 will be completely exempt from CGT . This can provide combined initial tax relief up to 78%.
- Disposals of SEIS shares are exempt from CGT where the shares are retained for at least three years.
The Main Conditions
Directors of the company (but not employees) may invest under SEIS provided they do not own more than 30% of the shares during the qualifying period.
To qualify under SEIS the company must comply with the following main conditions:
- Have less than 25 employees
- Have gross assets of less than £200,000
- Have been trading for fewer than 2 years
- Carry on a genuine new trade
Further information on SEISGuidance on SEIS for both companies and investors is available on HM Revenue & Customs website at the following link:http://www.hmrc.gov.uk/seedeis/index.htm
Other Venture Capital Schemes
There also exist two other long established venture capital schemes with the following main tax benefits:
The Enterprise Investment Scheme (EIS):
- Income tax relief of 30% available on the cost of newly subscribed for shares in an unquoted trading company provided shares are held for three years
- Capital gains reinvested in EIS shares can be deferred until their eventual sale
- Gains arising on the disposal of EIS shares are exempt from capital gains tax
- Certain capital losses incurred on the disposal of EIS shares can be set against the investor’s taxable income
- EIS shares qualify for Inheritance Tax 100% Business Property Relief
Venture Capital Trusts (VCT)
- Income tax relief of 30% on cost of newly subscribed for shares in a VCT provided shares held for five years
- Dividends received on VCT shares are exempt from income tax (although the tax credit is not actually repayable)
- Gains exempt from capital gains tax on eventual disposal of VCT shares