Private investors in British companies who inject capital as equity rather than loans can take advantage of some attractive tax breaks – providing they pay tax in the UK.
The Seed Enterprise Investment Scheme (SEIS) helps raise funding for new businesses which would have found raising money from banks hard to come by in recent years.
The Enterprise Investment Scheme (EIS) is like SEIS, but targets larger investments for companies seeking cash to fund growth.
The Venture Capital Trust (VCT) pairs wealthy investors with businesses seeking large amounts for funding as well.
Each equity investment is similar, but have subtle differences in tax breaks, so here are answers to some frequently asked questions about each scheme:
How does income tax relief work?
SEIS gives income tax relief at up to 50% on the maximum annual investment of £100,000, whatever the rate the investors pay their tax.
EIS offers income tax relief at up to 30% on the maximum annual investment of £1 million, while VCT gives the same rate of relief as EIS but only up to a maximum investment of £200,000 a year.
SEIS and EIS dividends are taxed at the normal rate, while VCT dividends are exempt from income tax.
Note: SEIS and EIS tax reliefs can be carried back to the previous tax year – starting in 2013-14 for SEIS.
Capital gains tax rules for SEIS, EIS and VCT
Investors who sell assets to raise cash to buy SEIS shares in the 2013-14 tax year get a 50% exemption on any chargeable gain. Any SEIS investment is also exempt from capital gains tax (CGT).
Assets sold to buy EIS shares have CGT deferred on any chargeable gain until the investment is realised. Any gain arising from an EIS is exempt from CGT.
VCT chargeable gains on shares worth up to £200,000 bought in any tax year are exempt from CGT
Dealing with equity investment scheme losses
SEIS and EIS investors can claim tax relief on any losses against other earnings or chargeable gains. Loss relief can be carried back or forward. VCTs have no loss relief.
Business property relief
SEIS and EIS shares held for at least two years qualify for business property relief. VCTs do not qualify.
Finding out more about SEIS, EIS and VCT
- SEIS
HM Revenue and Customs SEIS web site pages
- EIS:
HMRC EIS web site pages
- VCT:
HMRC VCT web site pages