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Obtain investment in your business the tax efficient way

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The purpose of a Seed Enterprise Investment Scheme (SEIS) or an Enterprise Investment Scheme (EIS) is to help small early stage schemes companies raise equity finance by offering tax reliefs to investors. Under SEIS the maximum annual individual investment in a company is £100,000 whereas under EIS the maximum investment is £1m. In the main the investor must hold the shares for 3 years as this will allow them to qualify for some rather attractive tax reliefs;
  • Income Tax – income tax relief on the initial of 50% under SEIS and up to 30% of the initial investment under EIS. This relief can be offset in the year the initial investment is made or carried back an offset against the prior year’s tax bill.
  • Capital Gains Tax – If after the 3 years investment period the shares held under the scheme are sold for a profit then the gain will be 100% exempt from capital gains tax. Reinvestment relief is also available such that any gains on investments that are reinvested in a tax efficient scheme will be subject to a 50% reduction on tax.
  • Loss relief – Where shares in a scheme are disposed at a loss then one can elect to offset this loss against income instead of being offset against any capital gains. This is usually advantageous.
  • Inheritance tax – 100% inheritance tax relief on shares is given 2 years after the date of initial purchase, under the rules for Business Property Relief (BPR Relief).
Although these reliefs are very attractive to an investor we should be clear who qualifies as an investor. In simple terms an individual will not qualify as an investor if they are deemed ‘connected’ with the company. An investor is considered connected;
  • If they control the company or hold more than 30% of share capital.
  • If they are a partner, director or an employee of the company.
The tax reliefs identified above can be withdrawn if during the 3 year period the investor becomes connected with the company. The reliefs are also withdrawn if the company loses its qualifying status. Whilst most companies should be able to raise equity under these schemes certain trading activities are excluded for example financial activities such as banking and insurance. As with any HMRC approved scheme such as these there are other conditions that have to be met prior to and during the lifetime of the scheme that are outside the scope of this article. As such, you will need to take advice before proceeding with an investment.

How can Wisteria help?

At Wisteria we have successfully advised a number of clients on raising funds under these schemes in particular we have obtained Advance Assurance certification from HMRC which certifies that the scheme was compliant the date the application was made. Businesses with this certification will clearly be more appealing to potential investors. In addition we have also advised investors looking to invest in such schemes. If you would like to know more then, we would be delighted to hear from you, please contact us.

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