Crowdfunding platforms are opening a new market for investors with cash to back entrepreneurs and their startups.
Several crowdfunding platforms have tagged investments that attract tax incentives under the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS).
The realisation is that startups qualifying for SEIS or companies looking for second stage funding under EIS can both offer investors tax breaks as well as an opportunity to make money.
SEIS and EIS offer crowdfunders a tax boost to maximise any profits they make from investing in a company.
Stuart Smith of specialist web site SEIS.co.uk explains that shares must be held in a SEIS or EIS for three years to qualify for the tax breaks.
SEIS and EIS benefits
If the company ceases trading or breaks the qualifying rules during that time, HM Revenue & Customs (HMRC) can take back any tax reliefs.
Meanwhile, in a SEIS, investors can:
- Grab income tax relief at 50% up to the value of their equity stake to £100,000
- Sell SEIS shares with 50% capital gains tax providing the cash raised is reinvested in SEIS shares
- Claim loss relief against other income if the SEIS fails
EIS offers similar tax benefits except:
- The maximum investment is capped at £1 million
- Any income tax or capital gains tax reliefs are at a rate of 30%
SIS and EIS are designed as growth investments rather than income providers, although investors can take dividends in cash.
However, few SEIS companies are likely to pay dividends as startups as profits are likely to be reinvested in expanding the business.
Investors also pay income tax on SEIS and EIS dividends at their marginal rate.
Investing in SEIS
Investors can deal direct with a SEIS or EIS company, but those who prefer a passive income, several investment funds offer managed portfolios.
The cost of entry is lower than making a direct investment and the return on investment is lower because of fund management charges.
Funds come as SEIS, EIS or a mixture of both mainly in the technology, pharmaceuticals and media sectors.
Two companies offering SEIS funds are Mercia Fund Management and Jenson Fund Partners.
