As investors, there are a number of different tax reliefs out there for you to choose from, set out by the Government.
Each is designed to encourage investments in smaller businesses, whether they are just getting off the ground or looking to expand.
This guide will explain the three main tax relief schemes for investors, and how each one may work for you.
EIS is a longstanding Government scheme designed to help smaller companies raise the money they need to grow. It also offers a range of tax reliefs to investors who purchase new shares in those companies.
Investors, including directors, can benefit from income tax relief when investing under the EIS.
You can claim up to 30% income tax relief on investments up to £1 million.
Relief is also available if the money invested is in knowledge-intensive companies which carry out R&D to make innovations in their field.
If you hold an investment under EIS for at least three years, you may be eligible for capital gains tax (CGT) disposal relief, meaning any gain is exempt from paying CGT.
If the shares are held for longer than three years, you can accrue CGT relief.
One of the most attractive safety nets is loss relief. If shares are disposed of at a loss, you can elect that the amount is set against the income of that year or the year before.
SEIS involves investment in brand new companies and provides investors with initial tax relief of 50% on investments up to £100,000.
You will also gain CGT exemption from any gains on SEIS shares.
If you want to invest with SEIS you can look into companies if they are less than two years old, have less than £200,000 in gross assets and have less than 25 employees.
To claim SEIS relief you must be a UK taxpayer at the time of your investment. You will not be eligible to claim if you are connected to the company by financial interest.
This means if you control the company or hold more than 30% of the share capital or voting rights, you will not qualify for SEIS.
Also, if you are employed or a partner in the company you won’t be eligible for relief under SEIS.
Although, if you are a director you technically are not considered an employee so if you invest in the said company but aren’t connected by financial interest, you can still apply.
VCTs are investment companies that are listed on the London Stock Exchange and set up to invest in small UK businesses under certain criteria.
The purpose of VCTs is to invest in small or relatively new businesses that are either unquoted or listed on the AIM stock exchange.
As these companies are seen as higher risk, there are a number of tax benefits in place to encourage investment.
You will be eligible for income tax credits of 30% on investments up to £200,000 each year when you buy shares in a new VCT share offer.
You need to have paid at least as much tax as the rebate and must hold shares for at least five years to qualify.
If investing through a VCT, there will be no income tax to pay on dividends from VCT shares and you won’t be liable to pay CGT on those shares when you sell.
Find out which works best for you
As an investor, you could benefit from some clear, practical advice from experts in the industry. The team at FMA can do just that.