New businesses also, by definition, don’t have a trading history and the credit rating that goes with it. This can make raising funds through borrowing, problematic. Equity finance, or the raising of capital through selling shares, is a way of securing funds up front. As a potential investor, however, you may be reluctant to invest in a new business. The Seed Enterprise Investment Scheme (SEIS) was set up by the UK government in 2012. It provides a range of incentives to encourage investors to back new start-ups. With these incentives including tax breaks and loss relief, it’s worth considering what SEIS has to offer.
Tax relief on your initial investment
SEIS includes provision for income tax relief. As a potential investor, this can make buying shares in a new or early stage business a far more appealing proposition. The scheme provides investors with 50% of their investment back in income tax relief. This offsets the cost of your initial investment and means that you get something back for your outlay almost immediately. You don’t get this sort of incentive when investing in a more established business, so it’s worth looking into the rewards, such as this, you get from SEIS, when you’re looking to expand your portfolio.
Further tax relief when you sell your shares
The income tax relief provided by the scheme gives you a financial incentive to make an initial investment. The scheme also provides more incentives further down the line when you come to sell your shares. You won’t pay any capital gains tax on shares held for more than three years, that were purchased with the support of the scheme. If you sell your shares within three years but re-invest the profits in shares in another SEIS-qualifying business, you’ll be exempt from capital gains tax for that too. There’s further cover for passing on shares after death. As long as your investments have been held for at least two years, they’ll qualify for relief on inheritance tax.
A safety net for investors
There’s always an element of risk with a start-up business. Changes in the market or in the wider economy can affect how a business performs, how much profit it makes and how long it survives. The Seed Enterprise Investment Scheme gives you cover as an investor in case the business you’ve bought shares in goes bust. Loss relief offsets any hit you might take, calculated according to your total investment and your tax rate.
All in all, the Seed Enterprise Investment Scheme provides a very attractive suite of incentives and rewards to encourage you to invest in a new business. With income tax relief on your initial investment and capital gains tax relief when you sell your shares, it’s a win-win situation for you and the business you’re supporting. Add to that, loss relief in the event of bankruptcy, and you can back a start-up or early stage business with confidence. As with all investments, however, it’s important to do your homework. Make sure that the company you’re investing in qualifies for the scheme and ask to see their Advanced Assurance. This is confirmation from the HMRC that the business is eligible.
It’s also wise to speak with a professional advisor, to discuss your own circumstances and if indeed, these types of investments are appropriate for you.
Tim Aldiss writes for Shadow Foundr: don’t just follow the crowd, follow experienced investors.