Important note: this article covers only some of the general tax considerations in relation to a limited number of ‘tax-efficient’ investments. It does not constitute, and must not be construed as investment advice in any form. You must consult with a suitably qualified financial advisor if you are considering any form of investment, and we do not offer advice in this respect under any circumstances. The provision of the generic tax considerations contained in this note constitutes neither investment advice nor tax advice and must not be relied upon for any purpose. Individual advice on your specific circumstances must always be sought.
Risk vs Reward: VCTs, EIS & SEIS
In the ever-evolving landscape of investment, individuals are constantly on the lookout for opportunities which not only promise potential returns, but also offer lucrative tax advantages. The world of capital investment is not for the faint of heart. Not only do investors take on the inherent risk that comes with unproven business models, but taxes on investment gains can also eat into returns.
There are, however, three interesting investment opportunities offered by HMRC to encourage the financial growth of small enterprises and start-ups and scale-ups in the UK. They do so by mitigating risk and giving tax relief to those who choose to invest in new and small businesses where there is a significant risk-to-capital for the investor.
These are:
- Venture Capital Trusts (VCTs)
- Enterprise Investment Schemes (EIS)
- Seed Enterprise Investment Schemes (SEIS)
How do these schemes work?
Whether you are an experienced investor looking to expand your portfolio or a newcomer enticed by the tax breaks, this guide serves as an overview of the world of investing in fledgling UK companies through VCTs, EIS and SEIS structured investments.
1. Venture Capital Trusts: Investing in innovation
What are Venture Capital Trusts (VCTs)?
VCTs are public entities, listed on the stock market, that invest in a diverse range of small, unquoted companies. By investing in a VCT, individuals gain exposure to a curated portfolio of promising ventures, carefully selected and managed by experienced professionals.
What are the tax implications of VCT investment?
Investors in VCTs can claim up to 30% income tax relief on up to £200,000 of investment. This substantial upfront tax relief allows investors to minimise their tax burdens while simultaneously supporting innovative companies. Additionally, any dividends received from VCT investments are exempt from income tax.
With VCTs, there is potential to make tax-free capital gains. If investors hold their VCT shares for at least five years, any gains realised upon selling those shares are entirely exempt from CGT, significantly reducing the burden of taxation on investor profits.
2. Enterprise Investment Schemes (EIS): Fuelling entrepreneurship
What is an Enterprise Investment Scheme (EIS)?
Introduced in 1994, the Enterprise Investment Scheme (EIS) is another investment vehicle which provides investors with generous tax reliefs. Here investors get the opportunity to provide capital to enterprises looking to scale-up. For fledgling companies, the EIS allows access to equity financing from angel investors, high-net-worth individuals, and venture capital funds.
What are the tax implications of EIS investment?
Investors can claim 30% income tax relief on investments up to £1 million per tax year. Moreover, any gains realised from the disposal of EIS shares are entirely exempt from CGT, provided the shares have been held for at least three years.
What is CGT rollover relief?
Investing in an EIS qualifying company offers a unique opportunity to defer CGT on taxable gains. This applies to gains realised from selling investments, a second home, or other assets. By reinvesting those gains into an EIS-qualifying investment, you can postpone paying CGT on the gains for as long as the money remains invested, and the EIS conditions are not violated. This deferral can be applied to gains of any size, made within three years before or one year after the EIS investment. Once you withdraw your money from the EIS investment, the deferred gain becomes chargeable again, and you'll need to pay CGT at the prevailing rate. Alternatively, you can continue deferring the gain by reinvesting the proceeds into another EIS-qualifying investment. This is called CGT rollover relief.
3. Seed Enterprise Investment Schemes (SEIS): Nurturing start-ups
What is a Seed Enterprise Investment Scheme (SEIS)?
The Seed Enterprise Investment Scheme (SEIS) is the much younger counterpart to EIS, unveiled in 2011 as part of Chancellor George Osborne's Autumn Statement. The purpose of SEIS is to spur economic expansion in the UK by encouraging new business creation and entrepreneurial risk-taking. This instituted major reforms to investment tax incentives, complimenting the pre-existing EIS. Since its debut, SEIS has become hugely popular and is now considered one of the most successful government initiatives ever implemented to promote private investment in budding enterprises in their infancy.
What are the tax implications of SEIS investment?
Under the SEIS, investors can claim a staggering 50% income tax relief on investments up to £200,000 per tax year.
The SEIS provides a beneficial "carry back" feature for investors. This facility allows you to elect for all or a portion of your SEIS shares acquired in one tax year to be treated as if they were acquired in the previous tax year. This option essentially enables SEIS investors to offset the tax relief associated with their investment against the income tax they paid in the preceding tax year. However, this carry back option can only be exercised if you have sufficient remaining SEIS allowance in the tax year to which you're carrying back the investment. By taking advantage of the carry back facility, SEIS investors have the flexibility to apply their tax relief to the tax year that offers the most favourable financial outcome.
Like the EIS, any gains realised from the disposal of SEIS shares are exempt from CGT, provided the shares have been held for at least three years. The SEIS also offers CGT reinvestment relief, a conditional exemption that provides the opportunity to exempt up to 50% of a chargeable gain, provided that a qualifying SEIS investment is made during the same tax year. It is important to note that there is no requirement for the proceeds from the disposal to be directly used to subscribe for the SEIS shares. As long as a qualifying SEIS investment is made within the same tax year as the chargeable gain, the reinvestment relief can be claimed. This relief allows investors to reinvest a portion of their gains by taking advantage of the SEIS incentives, without the need to directly apply the disposal proceeds towards the SEIS investment.
Additionally, if you sell your SEIS shares for less than you paid for them, the capital loss can be offset against any capital gains you may have realised in the same tax year.
Navigating complexities and maximising opportunities
While there are benefits to investing in VCTs, EIS, and SEIS from a tax planning perspective, navigating the intricate rules and regulations surrounding these investment vehicles can be a complex endeavour.
At Sanctoras we are well-versed in the nuances of VCTs, EIS, and SEIS and can provide invaluable guidance to investors, as well as to businesses seeking funding through these schemes. From ensuring compliance with ever-evolving legislation and regulations to identifying tax-efficient investment opportunities, we are here to assist in your wealth management and creation endeavours.
There is a significant risk-to-capital in investing within a start-up, EIS and SEIS shares being considered low-liquidity assets as they are long-term investments and should be carefully considered before they are undertaken. But as the investment landscape continues to evolve, forward-thinking investors seeking to diversify their portfolios could explore VCTs, EIS, and SEIS.
The team at Sanctoras, has aided many investors in assessing their personal tax position following SEIS/EIS & VCT investment. We also assist enterprises that are seeking SEIS/EIS funding. If you are curious as to how your investments impact your tax or are hoping to raise funds under a venture capital scheme and want to learn more about your company’s eligibility and the application process, please contact one of our specialists today at hello@sanctoras.com
