A number of Government approved investment schemes are available to encourage private individuals to invest in smaller high risk unquoted trading companies, and with effect from 2014/15 in social enterprises.
All have detailed rules concerning qualifying investors, the investment vehicle and type of investment and advice should be taken to ensure these conditions are complied with.
The schemes are:
- Enterprise Investment Scheme (EIS)
- Venture Capital Trust Scheme (VCT)
- Seed Enterprise Investment Scheme (SEIS)
- Social Investment Relief (SIR)
To encourage investment a number of tax reliefs are available which differ according to the scheme invested in and this article provides an overview of these incentives.
Income tax relief
A qualifying investment which ranges from £100,000 to £1 million depending on the scheme reduces an investor’s tax liability for the tax year. In some cases a claim can be made to carry back the tax relief to the previous year which can be useful where there is insufficient income tax liability in the current year. The income tax relief available is 30% of the qualifying investment with the exception of SEIS which is 50%. To retain this relief the investments generally have to be held for three years extended to five years in the case of VCT investments.
Capital gains and losses
Where the qualifying investments are held for three years, then on disposal any capital gain will generally be exempt. Where investments are disposed of at a loss, the loss will be allowable, but this is reduced by any income tax relief claimed. There is no minimum ownership requirement for VCT shares to qualify for CGT exemption but losses are not allowable.
Capital gains deferral relief
A gain on the disposal of any asset can be deferred where the gain is invested in a qualifying investment for EIS and SIR. This relief is not available for VCT or SEIS investments. The deferred gain generally becomes chargeable when the qualifying investment is disposed of (though certain other situations can trigger the gain).
However, for SEIS a reinvestment relief exists which exempts 50% of gains up to a maximum investment limit of £100,000 (i.e. £100,000 x 50%) when a qualifying investment is made.
Dividend (or other) income from the investment schemes are taxable with the exception of dividends on ordinary VCT shares which are exempt. If this is an area of interest to you please do ask us for further advice.