Investor Tax Reliefs

This note provides a summary of the different types of generous tax reliefs which are available to investors and “business angels” in the UK including an introduction to a new “investor relief” which was introduced by the Finance Bill 2016

BACKGROUND

To stimulate and support entrepreneurship, HMRC offers a number of tax incentives for individual UK taxpayers who invest in certain qualifying early-stage businesses which are based in the UK.  Brief descriptions of these incentives are set out below and Appendix 1 provides a tabular summary of the key features of each scheme.

SEED ENTERPRISE INVESTMENT SCHEME (“SEIS”)

The SEIS encourages investment in qualifying start-up companies by providing individuals with 50% of their investment ‘back’ by way of income tax relief.  Additionally, investors can benefit from 50% capital gains tax relief on gains which are reinvested in SEIS eligible shares.

Any gain arising on the disposal of the seed shares acquired may also be completely exempt from capital gains tax, and loss relief is available if the disposal results in a loss.

To say that the SEIS is incredibly generous is somewhat of an understatement.  For example, assuming an investor pays tax at 45% (additional rate) and makes an investment of £10,000 that fails completely, the investor would only lose £2,750 due to the tax relief available.  Should the investment succeed the investor will not only receive 50% of the investment ‘back’ in the form of income tax relief but would also pay zero capital gains tax on the profit from the disposal of those shares.

That is what makes the SEIS so attractive to investors and why Tughans would encourage all entrepreneurs to seek advance assurance from HMRC that they and their company are eligible for SEIS.

The latest figures released by HMRC show that between 2013/2014 over 2,000 companies received £170m in this type of investment (double that of 2013) – good news indeed. However, when you look at the portion of this attributed to Northern Ireland – only 25 companies with a total of £1.9m invested. It is clear to say that this scheme is being underutilised in Northern Ireland.

In fact the real picture is that London and the South East of England is attracting huge numbers of companies by the amount of SEIS and EIS available and that is a challenge to  non-Londoners and the Northern Irish market as a whole.

ENTERPRISE INVESTMENT SCHEME (“EIS”)

The EIS is designed to help smaller, higher-risk companies raise finance by offering tax relief on new shares in those unlisted companies that qualify. For the investor, it is a tax efficient way to invest in small companies.

The EIS is aimed at wealthier, sophisticated investors. People can invest up to £1,000,000 in any tax year and receive 30% income tax relief. However, they are locked into the investment  for a minimum of three years (as with SEIS).   Additionally, investors can defer any capital gains tax on gains which are reinvested in EIS eligible shares.

Any gain arising on the disposal of the shares would also be completely exempt from capital gains tax, and loss relief is available if the disposal results in a loss.

INVESTORS’ RELIEF (“IR”)

The Finance Bill 2016 introduced a new relief for investments in unlisted trading companies or trading groups. This new relief which was implemented in September 2016 reduces the rate of tax payable on capital gains to 10%, where newly issued shares are held for at least three years, and can cover up to £10m of lifetime capital gains.

The purpose of IR is to encourage greater external and longer term investment in unlisted trading companies and to plug the funding gap where relief under the enterprise investment scheme (EIS) or seed enterprise investment scheme (SEIS) is not available e.g. because the financial limits have been reached.

This is a welcome new relief that should help to attract investment into businesses without the need for the officer or director requirement to be met (required to avail of Entrepreneurs’ Relief (“ER”)), which is often not appropriate from the perspective of the investor or the company.

Although the EIS and the SEIS provide existing tax incentives for investors to invest in qualifying businesses, the introduction of IR (along with existing ER) allows companies to raise additional funds outside these schemes, as well as potentially being attractive to investors who have exceeded the limits for EIS and SEIS.  Given the potential tax savings involved of up to £1m for each investor and the limited restrictions compared to other reliefs such as EIS, we anticipate that IR will become very popular.

SUMMARY

If you are an investor attracted by the tax reliefs available under the various schemes or if you require assistance with the preparation of the necessary documentation to effect an investment, please get in touch with one of our corporate solicitors who can discuss the schemes or relief with you in greater detail.

 

 

The availability of any tax relief, including EIS and SEIS, depends on the individual circumstances of each investor and of the company concerned, and may be subject to change in the future. If you are in any doubt about the availability of any tax reliefs, or the tax treatment of your investment, you should obtain independent tax advice before proceeding with your investment.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice.  We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

 


APPENDIX 1

A SUMMARY OF THE RELIEFS

RELIEF
IR
SEIS
EIS
Maximum investment per year
No limit
£100,000
£1,000,000
Maximum investment per qualifying company
No limit
£150,000
£5,000,000
Maximum tax advantaged disposal at termination
First £10 million of lifetime gains
No limit
No limit
Income tax relief
n/a
50%
30%
CGT reinvestment relief
n/a
Up to 1/2 of investment
No limit
CGT rate on disposal
10%
0%
0%
May take value from the company during investment period (benefits, loans, repayment of share capital)
No
No
No
% share ownership investee company
No limit
Up to  30%
Up to 30%
May be a director?
Not at time of subscription.
May become an unpaid director at a later date
Yes
Yes, if not previously connected to the company (i.e. a business angel)
May be an employee?
Not at time of subscription.
May become an employee 180 days after provided no previous connection
Yes, only if a director
No
Minimum investment holding period to qualify for relief
3 years
3 years
3 years


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While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.