Whilst the SEIS has many advantages, its significance for investors is limited by the riskier profile of this type of investment as well as the maximum amount that wealthier investors can put into the scheme. The SEIS is often the first scheme that companies will use to raise investment and is often followed by the use of the Enterprise Investment Scheme (EIS).
The EIS encourages investment in smaller, unquoted, trading companies but the limits are significantly larger than for the SEIS. The main tax relief for investors comes in the form of Income Tax relief of 30% (compared to 50% for the SEIS). The maximum annual amount that an individual can invest through the EIS is £1 million. Similarly to the SEIS, Income Tax relief is limited to the amount which reduces the individual’s income tax liability for the year to nil.
EIS investments also qualify for other reliefs including, Capital Gains Tax deferral relief for the life of the investment and tax relief for any losses made on the shares bought. Another option is the Venture Capital Trusts (VCT) scheme. The scheme has been designed to encourage individuals to invest in small, usually high-risk trading companies. Income Tax relief is available at 30% on new subscriptions for ordinary shares in VCTs by individuals aged 18 or over. The maximum amount qualifying for relief is £200,000 in each tax year. In certain circumstances, investors can also use Entrepreneurs’ Relief to benefit from a reduced rate of CGT. Entrepreneurs’ Relief mainly applies to the sale of a business, shares in a trading company or an individual’s interest in a trading partnership. Where Entrepreneurs’ Relief is available CGT of 10% is payable in place of the standard rate.
There are a number of qualifying conditions that must be met in order to qualify for the relief. There is a lifetime limit that means that individuals can qualify for the relief more than once subject to an overriding total limit of qualifying capital gains up to the current £10 million cap. The new Investors’ Relief effectively extends the scope of Entrepreneurs’ Relief to external investors in unlisted trading companies. Investors’ Relief applies a 10% rate of CGT to gains accruing on the disposal of qualifying ordinary shares in an unlisted trading company held by individuals. The shares must be held for a period of at least three years starting from 6 April 2016 in order to qualify for the relief. There is a separate lifetime cap of £10 million for qualifying gains by investors.
If you are an investor give us a call to discuss the different investor reliefs that are possibly available to you.