Tax efficient schemes can benefit small business and investors

Jan 3, 2024

Funding is crucial to small businesses, especially during the start-up phase when overheads such as research and development or buildings and stock are high and trading income can be non-existent.

Meanwhile, successful individuals maybe looking for the most tax efficient way of investing their income. The two can come together in the form of three different schemes – Investors’ Relief (IR), Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS).

Each has a different set of qualifications and advantages dependent on the circumstances of the company and those looking to invest.

Ian Parker, Director at Whitley Stimpson, said: “We advise companies and individuals at both ends of the spectrum on these schemes including small business owners looking to attract larger companies to invest.

“Firms tend to be tech start-ups and we advise them on how they can attract investment. We also advise higher net worth individuals or larger companies looking to invest in start-ups to save tax.”

What are the details of each scheme?

IR reduces the rate of Capital Gains Tax (CGT) charged on share disposals to 10 per cent, with a £10m lifetime limit. Relief is available to both individuals and trustees meeting certain conditions and shares must be held for at least three years.

With SEIS and EIS, the investment must be made in a small, unlisted company. Most UK start-ups will qualify although there are some restrictions on activities such as farming or running a hotel.

SEIS is specifically aimed at very early stage companies and allows investment of up to £150,000 per tax year, with investors receiving a 50 per cent tax break. The investor will benefit from a CGT exemption on any profits from the sale of shares after three years.

The company’s maximum gross assets should be less than £200,000 and there must be fewer than 25 employees.

EIS focuses on medium sized start-ups employing under 250 staff. It allows investment of up to £1m per tax year with a 30 per cent tax break for the individual. Again, there is an exemption from CGT on profit generated by the sale of shares after three years.

Businesses looking to benefit from these schemes should apply for advance assurance from HMRC demonstrating how they qualify.

This enables companies to receive a provisional indication from HMRC whether they may be eligible to apply for tax relief for investors. Full eligibility can only be granted following the investment.

Ian added: “A major client in the tech sector saves tax by using EIS to invest in multiple engineering start-ups.

“Investors receive either 30 per cent or 50 per cent of their investment back after their first tax return, making the schemes more attractive.

“With SEIS and EIS there are no restrictions on the investor also being an executive or non-executive director to give advice and support whereas with IR you’re not allowed to be involved in the business.

“If you’re looking to invest big sums of money IR is the best option as the lifetime limit is set at £10m and established businesses can also use it. If the business floats on the stock exchange, then there is only a 10 per cent rate of tax on the investment which is clearly beneficial.”

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