Investors and entrepreneurs can take advantage of a range of tax reliefs when funding small businesses – not all of which are widely used.
Small businesses are frequently touted as the backbone of the UK economy. With this in mind, the government offers various tax reliefs for entrepreneurs and investors, to promote the financing of entrepreneurial ventures that could offer high growth but may pose a higher risk.
These initiatives include:
Introduced back in 1994, the EIS provides investors with a series of incentives to invest in small businesses:
One condition with EIS is that investors can’t have a close relationship with the business they’re financing. They cannot be a director, employee, or a close relative of a director or employee, prior to making the investment.
There are also restrictions on what EIS funds can be spent on during the qualifying period. Any breach of these conditions by the entrepreneur – deliberate or inadvertent – could void the tax relief. Investors therefore need to trust that the entrepreneur will abide by the EIS rules.
EIS is constantly under review, to ensure that it fosters the meaningful funding of ventures, rather than tax avoidance. Last year, the government narrowed the scheme’s qualifying criteria.
SEIS is effectively a version of EIS that applies to investment in earlier-stage businesses.
Since 2012, SEIS has offered investors:
To qualify for SEIS, companies must be under two years old, employ fewer than 25 people, and have less than £200,000 in assets. Each company can receive up to £150,000 in total under the scheme.
For companies that do not benefit from EIS or SEIS relief, or if investors have reached their EIS and SEIS thresholds, they can use Investors’ Relief to continue funding entrepreneurial ventures.
Though it applies to shares acquired since 2016, IR has a 3-year holding period requirement, so qualifying disposals will not be made until April 2019 at the earliest. As such, it hasn’t yet been looked at by the investment community with too much focus.
IR offers a 10% CGT rate on share sales – down from the usual 20% - up to a lifetime limit of £10 million in gains. That currently amounts to a potential £1 million in tax saved.
As with EIS and SEIS, investors must be genuinely putting their capital at risk to help businesses grow, rather than using IR as a tax avoidance strategy.
There are fewer restrictions on IR than the other schemes outlined above, with the key one being that there is no size limit on qualifying companies – although they must be unlisted and currently trading
ER gives business owners the same relief that IR offers investors – that is, 10% CGT on up to £10 million in lifetime gains. And as with IR, there are no qualifying limits on company size.
Businesses owners can take advantage of ER when selling their own businesses, and potentially use IR if they use the funds to invest in other ventures.
If you’re a business owner considering external investment, or an investor looking for potential ventures to finance, make sure you consult a professional tax adviser before going ahead.