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SEIS tax breaks for investors greatly encourage much-needed seed capital in new businesses.
The SEIS is most valuable for taxpayers who can fully benefit from the tax reliefs on offer. A taxpayer investing in a SEIS can benefit from the following main tax breaks:
- Income tax relief worth 50% of the amount invested to qualifying individual investors on a maximum annual investment of £100,000.
- Exemption from capital gains tax on disposals of SEIS shares that have been held for three years.
- A 50% exemption from capital gains tax on gains reinvested within the scope of the SEIS.
Worked Example
These tax breaks help significantly reduce the risk for investors even if the investment is a total failure. Let’s look at an example where this happens.
John is a 45% taxpayer and invests the maximum £100,000 in a qualifying SEIS. If the company folds and the shares have no value, tax reliefs could mean that the maximum loss was £27,500. This is after claiming income tax relief and loss relief.
The loss relief can be set against the taxpayers’ income or capital gains. There may be further savings if the taxpayer claimed the 50% exemption from capital gains tax for gains reinvested.
If the investment ends up breaking even i.e. after three years, John sells his shares for £100,000. He will have benefitted from 50% or £50,000 income tax relief at the time of the investment. When the shares are sold he makes an effective profit of £50,000 with no capital gains tax liability.
If the shares had doubled in value after three years, John could have made £150,000 tax-free.
Provisions & Conditions
The possibility of these kind of returns have made the SEIS a very popular scheme, especially for wealthy taxpayers. It is important to note that the reliefs are only available where there is sufficient liability against which to set it.
There are carry-back provisions that allow taxpayers to treat some or all of the cost of the shares to be carried back to the previous tax year. Under certain circumstances, small business owners can use these rules to invest in their own businesses.
At Key Business Consultants we know that every new business needs to consider SEIS tax relief in order to maintain a competitive advantage with other new businesses. If you are going to spend money on new business then why not get tax relief in doing so? Get in touch.
