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Don’t miss out when financing enterprises

Don’t miss out when financing enterprises

Investors and entrepreneurs can take advantage of a range of tax reliefs when funding small businesses – not all of which are widely used.

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Small businesses are frequently touted as the backbone of the UK economy. With this in mind, the government offers various tax reliefs for entrepreneurs and investors, to promote the financing of entrepreneurial ventures that could offer high growth but may pose a higher risk. 

These initiatives include:

  1. The Enterprise Investment Scheme (EIS)
  2. The Seed Enterprise Investment Scheme (SEIS) 
  3. Investors’ Relief (IR) 
  4. Entrepreneurs’ Relief (ER) 

1. Enterprise Investment Scheme

Introduced back in 1994, the EIS provides investors with a series of incentives to invest in small businesses:

  • 30% income-tax relief on up to £1 million of investment in a qualifying company in each tax year – as long as they keep their money in the company for at least three years
  • capital gains tax (CGT) exemption if they sell their shares after the three-year qualifying period
  • deferral of any CGT liability arising on the sale of assets if they invest the gains into an EIS-qualifying company
  • income-tax relief for the loss on their shares if a company they invest in fails

One condition with EIS is that investors can’t have a close relationship with the business they’re financing. They cannot be a director, employee, or a close relative of a director or employee, prior to making the investment. 

There are also restrictions on what EIS funds can be spent on during the qualifying period. Any breach of these conditions by the entrepreneur – deliberate or inadvertent – could void the tax relief. Investors therefore need to trust that the entrepreneur will abide by the EIS rules.

EIS is constantly under review, to ensure that it fosters the meaningful funding of ventures, rather than tax avoidance. Last year, the government narrowed the scheme’s qualifying criteria. 

2. Seed Enterprise Investment Scheme

SEIS is effectively a version of EIS that applies to investment in earlier-stage businesses. 

Since 2012, SEIS has offered investors:

  • 50% income-tax relief on investments of up to £100,000 in any tax year
  • CGT exemption when selling shares in an SEIS company
  • Income-tax relief on the loss on their shares if the company fails

To qualify for SEIS, companies must be under two years old, employ fewer than 25 people, and have less than £200,000 in assets. Each company can receive up to £150,000 in total under the scheme.

3. Investors’ Relief

For companies that do not benefit from EIS or SEIS relief, or if investors have reached their EIS and SEIS thresholds, they can use Investors’ Relief to continue funding entrepreneurial ventures. 

Though it applies to shares acquired since 2016, IR has a 3-year holding period requirement, so qualifying disposals will not be made until April 2019 at the earliest.  As such, it hasn’t yet been looked at by the investment community with too much focus.  

IR offers a 10% CGT rate on share sales – down from the usual 20% - up to a lifetime limit of £10 million in gains. That currently amounts to a potential £1 million in tax saved. 

As with EIS and SEIS, investors must be genuinely putting their capital at risk to help businesses grow, rather than using IR as a tax avoidance strategy. 

There are fewer restrictions on IR than the other schemes outlined above, with the key one being that there is no size limit on qualifying companies – although they must be unlisted and currently trading 

4. Entrepreneurs’ Relief

ER gives business owners the same relief that IR offers investors – that is, 10% CGT on up to £10 million in lifetime gains. And as with IR, there are no qualifying limits on company size.  

Businesses owners can take advantage of ER when selling their own businesses, and potentially use IR if they use the funds to invest in other ventures. 

Seek advice

If you’re a business owner considering external investment, or an investor looking for potential ventures to finance, make sure you consult a professional tax adviser before going ahead. 

Our experts can help you understand the various available tax reliefs before you invest. Contact Craig Rowlands and Nick Pheasey to learn more. 

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