Tax-advantaged investment schemes
Successive governments have recognised business funding reliefs as a valuable means of encouraging investment into technology companies, writes James Francis, partner at Ensors Chartered Accountants.
The UK provides three such tax-advantaged schemes; the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) and the Venture Capital Trusts (VCT) regime.
EIS enables individuals to invest in small and medium-sized companies in return for generous tax reliefs, while SEIS provides relief for smaller investments.
EIS’s headline incentives are the ability to invest up to £1 million (per tax year) in shares issued by a qualifying company in return for a 30 per cent non-repayable Income Tax credit and a potential exemption from Capital Gains Tax (CGT) when the shares are sold; in both cases the EIS shares must be held for at least three years.
There is further Income Tax relief for investment losses if the company fails. It is also possible for investors to defer CGT on the disposals of other assets by reinvesting proceeds into qualifying EIS shares.
While changes introduced from 2015 have limited the scope of EIS for many investments, more recent changes have made EIS more generous for knowledge-intensive companies in terms of how much a qualifying company can raise, the period over which it can first raise EIS investment and how much the individual can invest.
This applies to companies that carry out a high level of innovation creating IP they intend to exploit or where at least 20 per cent of the workforce is “skilled”.
SEIS is specifically aimed at smaller companies which have only recently begun to carry on a qualifying trade.
SEIS investors can claim Income Tax relief equal to 50 per cent of their subscription for qualifying shares of up to £100,000. Gains from selling qualifying SEIS shares are exempt from CGT provided the investor has held the shares for three years.
CGT reinvestment relief also exists so that where an individual realises a capital gain and reinvests all the proceeds in SEIS shares, half of the gain will be tax exempt.
If the shares are sold within three years of issue, all SEIS reliefs are clawed back. A company cannot issue SEIS qualifying shares if it has already issued EIS shares or received investment from a VCT.
EIS and SEIS shares will normally qualify for Inheritance Tax business property relief after two years’ ownership.
A VCT is an investment company with shares listed on a European regulated market. It is required to invest in and maintain a portfolio of qualifying trading companies with a permanent establishment in the UK.
The investment differs from EIS/SEIS in that the investor buys into the investment vehicle as opposed to the investee company. VCT is therefore a more passive investment, albeit one that dilutes the risk of investment in specific companies.
The investor can claim income Tax relief at 30 per cent on the investment made into the VCT, limited to a maximum investment of £200,000 per tax year.
This relief is clawed back if the VCT shares are sold within five years of the date of issue. Dividends paid by the VCT on qualifying investments are not taxable and gains made on the disposal of VCT shares are exempt from CGT, with no minimum holding period. The flipside is that losses incurred on a sale of VCT shares are never allowable for capital gains tax purposes.
A sunset clause for EIS and VCT (but not SEIS) income tax relief has been introduced. This ensures that income tax relief will no longer be given to subscriptions made on or after 6 April 2025, unless the legislation is renewed by Treasury Order.
Please be aware this is a very high-level summary of EIS, SEIS and VCT; all are subject to various complex requirements. Professional advice both at the time of investment and going forward is essential to ensure that reliefs are obtained and not subsequently clawed back.