As the year-end approaches, it’s time to revisit the tax benefits of schemes set up by the government to bolster the finances of start-up companies.
Since the financial crisis, banks have almost stopped lending to risky businesses that cannot show a sparkling trading history.
To encourage investors to stake their money directly into these companies, the government runs several investment incentives – the Seed Enterprise Investment Scheme (SEIS); Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT).
The investment year runs from April 6 to the following April 5, so the door for the current 2018-19 tax year is only open for a short while.
Many investors look to SEIS or EIS for tax incentivised investment once they have maxed out pension savings – VCT is a less popular option.
Why invest in start-up businesses?
Remember SEIS and EIS investment allowances are separate from each other and pension lifetime allowances and annual contribution caps, so investors can top up their savings without worrying about how they impact money set aside in other schemes.
A model investment stack would start with a pension, then SEIS and if both hit maximum contributions, and EIS would kick in to sweep up any extra cash.
Between them, the investments add-up to £1.64 million – although most investors would be higher or additional rate taxpayers with pension contributions restricted to as low £10,000 a year rather than the maximum of £40,000.
Start-up and growing businesses typically look for SEIS, EIS and VCT investments as they have difficulties raising money elsewhere. These investments are risky, but the potential for high returns is also greater.
SEIS, EIS and VCT compared
Each scheme operates slightly differently, so here are the investment and tax relief pros and cons laid out side-by-side for comparison:
| SEIS | EIS | VCT | |
| Income tax relief on annual investment | 50% | 30% | 30% |
| Maximum annual investment | £100,000 | £1 million | £200,000 |
| Tie-in period to gain tax relief | 36 months | 36 months | 60 months |
| Dividends | Taxable | Taxable | Mostly tax-free |
| Income Tax carry back | Yes | Yes | No |
| CGT relief on disposal of shares | Yes | Yes | Yes |
| Loss relief | Yes | Yes | No |
| Inheritance Tax Business Property Relief | Yes | Yes | No |
| Launched | 2012 | 1994 | 1995 |
| Companies receiving investment | 8,440 | 28,000 | – |
| Investment | £799 million | £18 billion | £7 billion |
Source: HMRC
