Tax breaks for the Seed Enterprise Investment Scheme (EIS)
Launched in 2012, the Seed Enterprise Investment Scheme (EIS) was supposed to be a temporary feature in our tax system, designed to incentivise investment in start-up companies as the country crawled its way out of the worst recession in modern history.
Despite the Government telling investors Seed EIS was here to stay permanently and the generous tax breaks on offer, there is still a flat year-on-year uptake, with the total amount raised by qualifying companies at £174 million in 2013/14, £179 million in 2014/15 and £180 million in 2015/16, according to recent statistics published by HM Revenue & Customs.
So what’s on offer? Qualifying investors benefit from a whopping 50% Income Tax refund for investments in Seed EIS companies. For example, a £10,000 investment in a qualifying company will shave £5,000 off an investor’s Income Tax bill; the claim can also be spread to the previous tax year. This can be combined with a 50% Capital Gains Tax (CGT) exemption, so if the investor sells another asset and incurs a capital gain of £10,000 in the same tax year as the investment, half of the gain will be exempt, saving a further £1,000 tax for a higher rate taxpayer with gains taxed at 20%.
If the investee company goes bust, the investor can claim Income Tax loss relief on the cost of the original investment (£5,000 net of the initial tax relief claimed). For a higher rate taxpayer, the investor would benefit from a further £2,000 tax back in loss relief; the Government effectively underwrites 80% of the investment in this case, if all reliefs are utilised.
There is a £100,000 maximum annual subscription limit, although it is unlikely a person of modest wealth would use up this allowance but think about this; if you are set to earn £30,000 (in salary) in 2017/18 and invest £7,400 in a Seed EIS company by 5 April 2018, your Income Tax bill for the year will be wiped out entirely.
For more information please do not hesitate to speak with me or Personal Tax Partner Danny Clifford.