If you have maxed out your pension contributions for the year and still have cash to invest, where’s the best place to look for a better than average return?
To attract money into start-up businesses, the government offers some generous tax breaks through the Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCT).
Both offer decent tax returns at similar levels of investment, but the schemes do have their differences.
£100,000 to invest
Look at the Seed Enterprise Investment Scheme (SEIS).
The annual investment limit is £100,000 for an investor with 50% income tax relief. That gives someone ploughing the full £100,000 into a new start company a refund of £50,000 on tax paid.
SEIS comes with other benefits for investors.
Providing an investor holds shares in a SEIS company for three years, any gain in value they might have is free of capital gains tax.
New businesses are risky, so if the SEIS company fails, investors can claim loss relief against other income. Loss relief will not cover the full investment, but together with the ingoing income tax benefit, offers cover for at least 80% of the stake money.
SEIS shares also qualify for inheritance tax business property relief.
£200,000 to invest
Consider a VCT.
These work in much the same way as SEIS, but the £200,000 a year investment cap for an investor comes with a minimum five-year shareholding.
Tax relief comes in at 30% – so a maximum £200,000 stake offers a £60,000 tax refund.
Any gain in share value is again free of capital gains tax, but VCT dividends are exempt from income tax.
Unlike new SEIS businesses that are unlikely to pay dividends, VCT are more established companies.
Another important aspect of VCT is no tax relief is offered for a company making a loss and the scheme is outside IHT business property relief.
Look at the differences
SEIS and VCT both have benefits and drawbacks for investors.
VCT have had a longer shelf life than SEIS, and the first SEIS companies are about to emerge from the scheme April 2017 onwards. Few profitable SEIS companies have been reported to date although hundreds of millions have been poured into the scheme by investors.