Investors could look at the Seed Enterprise Investment Scheme (SEIS) as a tax-effective alternative to ISAs.
As the Bank of England reports the consumer price index has dropped to 1.9%, a basic rate taxpayer needs a return on savings that offers more than a 2.38% break-even point.
For higher rate taxpayers, the figure is even more – a minimum 2.66% – while top rate taxpayers need an interest rate of 2.75% to pull ahead of inflation.
Only 84 out of more than 200 ISAs currently offer a rate that tips 2.38%, but although cash in an ISA grows tax-free, the low maximum limit of £11,250 provides only a respite from tax and inflation shelter for anyone with more to invest.
SEIS investments may carry more risk, but the tax breaks of a three-year investment of up to £150,000 may offer tax benefits after someone has used their full ISA allowance for the year, said a writer of seis.co.uk.
SEIS tax breaks
The SEIS specialist explains any saver can benefit from SEIS tax breaks, including:
- An income tax reduction equivalent to the 50% of the SEIS investment for all taxpayers, which means a £25,000 investment comes with a £12,500 relief on income tax paid either in the current tax year or by carry back to last year
- A capital gains exemption on asset disposal in the current tax year to raise money for a SEIS investment
- No capital gains tax on any profit made from the SEIS investment after three years
- Loss relief should the investment in a SEIS go wrong
Taking a stake in a start-up
According to the website,“SEIS is a government-backed program to encourage investment in start-up companies that cannot raise money to trigger growth from the banks or other traditional business funding sources.”
“Investors buy an equity stake in a new company and if the company does well, the value of their shares increases.
“If the company fails, another relief sets off losses against other income tax.”
According to HM Revenue & Customs, around 1,200 companies have taken advantage of SEIS since the scheme started in April 2012. Investors have pumped £90 million into the businesses.
HMRC argues the risk to investors is low as the tax reliefs safeguard more than 80% of the investment regardless of whether the company succeeds or fails.