Chartered Accountants and Professional Business Advisers

If you subscribe for shares in a qualifying early stage business under the SEIS scheme and keep them for three years you can get income tax relief of 50% of the investment and won’t pay capital gains tax (CGT) when you sell the shares.

If you make a capital gain on something else and ‘reinvest’ the proceeds in SEIS shares, up to half of the reinvestment can be deducted from the gain. The effect is that a £1,000 investment could get £500 income tax relief and also £140 CGT relief (28% of 50% of £1,000). This means the net after-tax cost of the investment could be just £360.

The Enterprise Investment Scheme (EIS) is a similar scheme for larger companies. Once held for two years, shares in most SEIS and EIS companies are exempt from inheritance tax as they qualify for Business Property Relief.

For higher rate taxpayers these schemes can offer a very generous set of tax reliefs. Unsurprisingly, there are a number of rules around the investor, the type and timing of the investment and how it’s disposed of.

Don’t put all your eggs in one basket

Investing in start-ups under SEIS and EIS can be risky as some businesses will inevitably fail and you may not get your money back. So if an investment does go wrong, what further reliefs are available?

Although you don’t pay CGT on any gain on the shares, you can claim CGT relief if you sell them at a loss. This is calculated on the cost of the shares less the income tax relief. So, for a £1,000 subscription for shares eventually sold for £200 there is a CGT loss of £1,000 less £500 income tax relief and £200 sale proceeds. The loss is therefore £300 to be set against other gains, saving tax of up to £84 on, say, the sale of a holiday home.

However, for subscriptions for shares in an unlisted trading company, it’s often possible to claim the loss against income instead. At the higher income tax rate the £300 loss could be worth £135 of tax saved. But if the investment was a complete loss, this would be £225. So, with maximum relief from income tax on investment, maximum CGT relief for reinvestment of a gain and maximum income tax relief for the loss on disposal of the shares, the net after-tax cost of the £1,000 investment would be just £135 (with reliefs totalling 86.5%).

For further information, please speak to your usual contact.