New Investors

Although savers and investors have no doubt been feeling down in the mouth for the last few years, there is finally another option for them to make financial gains.  An innovative approach has been introduced by the government to kick start the economy. Private investors now have the option of investing in small businesses with protection against investment loss through tax relief.

The government put this new tax relief scheme into place in 2012. Named the Seed Enterprise Investment Scheme, it looks very similar to the Enterprise Investment Scheme, and is in fact modeled on it. To cut to the chase, it provides protection against the investment failing through tax relief on both income tax and capital gains tax.  The investor can’t go wrong.

Can you give me an example of how it works?

Take a look at this example:

If you invest £10,000 into a small SEIS qualifying company then you will receive 50% of that back in the form of income tax relief. For a moment, imagine that the worst came to the worst and the company that you’ve invested in goes bust. You are now in position to offset the other £5,000 against your income tax. This will be at the same rate of tax that you already pay.

Let’s look at how this will work in practice. Supposing that you as the investor, have a taxable income of £50,000. On this you expect to have to pay £9,800 in tax. By investing £10,000 into the small company, you can reduce your income tax bill by £5,000. This will take it down to just 4,800.

If you invest £100,000 in a business and they do exceptionally well and decide to sell up. You receive your £100,000 back plus you receive another £100,000. If you had invested outside of this scheme, you’d now be expected to pay tax at a rate of 28% on your gain. So that’s a tax bill of £28,000. So you walk away with £72,000 in profits.

By putting your money back into the SEIS system, then you would in effect only put down £22,000 for a chance to win back £200,000 or more. The rest was returned to you in the form of income tax relief and if you sold any assets during the year in capital gains tax relief.  You’re left with a return of 809%! You most certainly would have to be waiting a long time to get that from anywhere else.

How do small businesses qualify?

There are some restrictions on which small businesses can qualify for investment through the SEIS program.

  • The business must have been operating for two years or less
  • Only certain trades qualify and the company must be undertaking or preparing to undertake one of those trades
  • No investor can hold more than 30% of the company in shares
  • The company must not already be operating on the stock market and it must have fewer than 25 employees
  • The business’s gross assets must be under £200,000 at the point of investment

Also, you should know that the business can only receive a maximum of £150,000 through this investment program.

What else should I know?

It seems that the government and the tax office didn’t push this new investment and tax relief model out to the masses – or at least didn’t do a lot of PR for it. Some people are stating that it’s been kept very low key – maybe because it’s such a generous offer. It can offer astonishing returns at a very low tax rate – maybe this is why it hasn’t been so well publicised.

Also, you must know that although both the SEIS and EIS models will run through to at least 2017, it’s possible that the capital gains tax relief may not be extended after the 2013/2014 tax year.

In summary

SEIS is the opportunity to invest in new businesses whilst enjoying excellent protection just in case things going wrong. You have a limit of £100,000 per tax year.

So to put it bluntly, the government is taking the risk, and the pain out of your investment.