Up to 98% Tax Relief – How to Attract Finance by Derisking Investors Money
You can attract investors money by offering them up to 98% tax relief and guaranteed gains from a relatively new and little-known shelter intended to encourage investment in small companies. Investors can make use of the scheme to reduce an income tax bill and avoid capital gains tax altogether.
For example, a recent client bought a £10,000 stake in a start-up business I introduced him to, while only risking £200 of his own money. He’s used a variation of the Enterprise Investment Scheme (EIS) – called Seed EIS or SEIS.
To be fair, generous tax reliefs are hedged around with various restrictions. For example, SEIS excludes any companies which have already raised funds under the EIS scheme (its bigger brother) and any companies which have been incorporated for more than two years.The limited company must also have fewer than 25 employees and no more than £200,000 in gross assets. Also the maximum that any investor can place in a SEIS is £100,000 a year and the shares must not be sold within 3 years, otherwise they will suffer Capital Gains Tax (CGT) on them.
Immediate Tax Breaks
There are immediate benefits for anyone who has paid a lot of income tax and/or faces a substantial CGT liability. For those clients who tick both boxes, upfront income tax relief of 50%, regardless of your marginal rate, is available on SEIS stakes so long as you have paid sufficient tax.
Here’s an example, if you invest £10,000 you will get back £5,000 as long as you have paid enough tax. Then there’s the CGT relief. If you have realised a gain of £10,000 you will usually owe £2,800 CGT. If you invest the gain of £10,000 into an SEIS the tax owed is wiped out permanently, whereas on a normal EIS the gain is only deferred.
Any profit on the SEIS is tax free and any loss can be offset against income at your marginal rate. So, if the company went bust and you lost everything you could claim relief against the portion that didn’t get income tax relief. In this example, that would be £5,000 – saving £2,000 tax if you are a 40% tax payer.
So, to recap, the real cost of my £10,000 investment is minus £5,000 upfront income tax relief; minus £2,800 CGT avoided forever; minus another £2,000 – or more – income tax saved if the SEIS goes bust. That means the net money at risk is £200 per £10,000 invested by a 40% taxpayer.
What’s More Unbelievable…
Believe it or not but 45% taxpayers are guaranteed a profit if the SEIS goes bust. They would get 45% relief on £5,000 and be able to reclaim £2,250 income tax, rather than the £2,000 shown in the example above for 40% taxpayers.
With generous tax reliefs for high earners mean that win or lose, with the SEIS the sky is the limit. Combine this approach with peer to peer funding, or Crowdfunding sites which allow individuals to invest in start ups, and you can see the future of raising finance for small business start ups.
If you would like to invest in a small business and need advice on how to take advantage of these tax breaks, speak to Cloud Accounting NI on 07868 663 538