For years, the UK government has offered investors a wide range of tax incentives. Some - such as the Individual Savings Account (ISA) - are now household names, while others are reserved for experienced investors looking to maximise returns and minimise risk.
The Innovative Finance ISA (IFISA), which can be used to hold peer-to-peer loans and debt-based securities tax-free, is one method of tax-efficient investing introduced in April 2016.
The target returns of the account depend on its underlying asset, with the Carlton Bonds property-backed IFISA targeting potential returns between 4.75% and 7.75% for investors.
However, there are a number of ways that investors can invest tax efficiently, each with their own focus and benefits, giving investors the ability to choose an approach that best suits their priorities and personal circumstances.
For the purpose of this article, we’re going to take an in-depth look at two of the most generous tax incentives for experienced investors investing into high-growth, early-stage businesses - the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS).
There are many reasons why investors in the UK decide to support businesses in their growth plans, be this exclusively philanthropic for the impact it can bring, or purely for financial return.
However, most are looking for something in-between. To aid this, one of the strategies employed is investing in a tax-efficient way into high-growth SMEs.
This approach allows an investor to support the next generation of exciting, British businesses while mitigating some of the risk through the use of tax-efficient incentives and reliefs. This also allows for a greater upside benefit, particularly when the return is compared to the net investment outlay.
SMEs are crucial to the economy, accounting for three fifths of the employment and approximately half of the turnover of the private sector.
In 2019, 99.9% of the total business population in the UK was made up of small and medium-sized businesses.
And these businesses are often reliant on the support of private investors to thrive, while investors can receive tax reliefs from EIS and SEIS-eligible businesses which aim to offset the higher risks associated with investing into early-stage businesses.
Enterprise Investment Scheme (EIS)
To stimulate entrepreneurship and encourage private investors to invest in unlisted, early-stage businesses, the UK government launched EIS in 1994.
An EIS investment is a direct investment into a single qualifying company. To be EIS-eligible, businesses must:
have less than 250 full-time employees
have gross assets of less than £15 million
be within seven years of their first commercial sale
Since its inception, 29,770 individual companies have received investment through EIS, and £20 billion of funds have been raised.
The tax reliefs available when investing into an EIS-eligible startup include:
Up to 30% income tax relief. This is applicable on a maximum annual investment of £1 million* and in order to claim, you must have sufficient income tax liability and hold the shares for at least three years.
No capital gains tax when selling EIS shares. If you have held your shares for at least three years, claimed income tax relief and the company still qualifies.
Capital gains deferral. You do not have to pay capital gains tax immediately when using a gain from the sale of any asset to make an investment into an EIS-eligible company.
Inheritance tax relief. After being held for two years, EIS investments are eligible for Business Relief and become inheritance tax-free.
Loss relief. If your EIS investment is realised at a loss, it can be offset against the same or previous year’s income tax, or the same year’s capital gains tax.
*The maximum annual investment increases to £2 million if at least £1 million is invested in knowledge-intensive companies. These are, broadly speaking, young and innovative companies that are investing heavily in research, development or innovation.
Seed Enterprise Investment Scheme (SEIS)
SEIS was introduced in April 2012, and the tax reliefs available are even more generous than those available through EIS, because these investments focus on younger and smaller – and therefore higher risk – companies.
To be SEIS-eligible, businesses must:
be unquoted and less than two years old
have less than 25 full-time employees
have gross assets of less than £250,000
Since it was launched, 12,900 companies have benefited from SEIS, and it has stimulated over £1 billion of investment into UK businesses.
For investors, the SEIS tax reliefs include:
Up to 50% income tax relief. Up to 50% income tax relief can be claimed on a maximum annual investment of £100,000. To claim, you must have sufficient income tax liability and hold the shares for at least three years.
50% capital gains reinvestment relief. Provided you receive SEIS income tax relief, you can offset any other capital gains from the same year up to half the value of your investment.
No capital gains tax on profits. You do not have to pay capital gains tax when selling SEIS shares as long as you have held them for at least three years, claimed income tax relief and the company is still SEIS-eligible.
Inheritance tax relief. After being held for two years, SEIS investments are eligible for Business Relief and become inheritance tax-free.
Loss relief. If your SEIS investment is realised at a loss, it can be offset against the same or previous year’s income tax, less any income tax received.
Live EIS-eligible investment opportunity
Growth Capital Ventures (GCV) are the fintech firm behind the creation, development, infrastructure and software of the Carlton Bonds platform.
We’re excited to bring you the news that GCV has launched their EIS-eligible funding round to drive the next phase of growth.
Existing institutional investors are supporting this funding round with £1 million of growth capital. The funding round is already oversubscribed, so GCV is releasing further equity to allow private investors to participate and co-invest alongside institutional investors.
This opportunity is now open to investors until Friday 13th November.
The base case is targeting a 12.9x money on money return. As with all investments, your capital is at risk and returns are not guaranteed.
This investment opportunity is also EIS-eligible, which means you can benefit from a number of generous tax reliefs:
Save up to 30% on your income tax bill. Up to £300,000 per year (or £600,000 when investing in knowledge-intensive companies).
Very generous allowance. Up to £1 million (or £2 million if anything above £1 million is invested in knowledge-intensive companies).
Enjoy tax-free growth. No capital gains tax on investment profits to maximise your potential returns.
Defer capital gains from other investments. Potentially indefinitely.
Offset any future losses against your income. So you save income tax and minimise downside risk.
Pass on your investment free of Inheritance tax.
Remember: tax rules can change and tax benefits depend on circumstances.
For more information and to download the Investment Memorandum, click here.
Originally published 14th September 2020, updated 23rd October 2020.