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Tax Incentives for Small Business Investors (EIS, SEIS, VCT)
At 2E we frequently meet with new clients who are just starting up a small business. Whether it’s a restaurant, design label or a crowdfunded tech startup, small businesses are often perceived as high risk ventures, and those just starting out may experience difficulty in attracting funding.
In recent years the HMRC introduced several initiatives designed to help SMEs to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies. These are the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCT) and each one provides a tax benefit to would-be investors.
But what are the differences? In a nutshell, the schemes offer benefits in these areas: income tax, capital gains tax, tax relief on losses, relief on deferral and re-investment, and business property tax.
The amount of relief is specific to the scheme, so here’s the breakdown:
EIS offers income tax relief set at 30% of the amount you invest in EIS shares, up to a maximum annual of £1m. Dividends paid on EIS shares are taxable.
SEIS offers relief at 50%, with a much lower maximum annual investment of £100,000. Dividends here too are taxable.
VCT offers relief at 30% of the amount invested, up to a maximum of £200,000. Dividends are exempt (subject to a maximum allowance).
Capital gains tax relief
An EIS investor is exempt from capital gains tax on selling of shares, provided he or she has held them for three years. In practice, this means that growth in value is effectively tax-free – a great incentive to invest.
SEIS offers a similar incentive, with the additional stipulation that the investor must have claimed income tax relief on the shares and held them for three years.
A VCT investor is exempt from capital gains tax on the disposal of shares acquired within the allowable maximum of £200,000 in any one tax year.
Relief on Capital Losses
EIS and SEIS investors are somewhat cushioned from the risks of SMEs by income tax relief on losses made after allowing for relief on the initial investment.
In practice, then, if you spent £10,000 on shares and claimed 30% income tax relief, your net investment would be £7,000. If you sold the shares for £7,000, £2100 of your tax relief would be withdrawn, meaning you can deduct that amount from your income for income tax purposes.
VCT schemes do not offer this relief.
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