Wealthy savers are pouring money into start-ups in a bid to cut their capital gains taxes in half ahead of tax increases expected in the Budget.
Investors invested 250% more in the Seed Enterprise Investment Scheme (SEIS) between July 4, the day of the general election, and September 16 than during the same period last year, according to investment firm Wealth Club.
It comes as the government considers ways to encourage more investment in British businesses to boost the UK economy. Businesses with assets of less than £350,000 and fewer than 25 full-time employees are eligible for SEIS funding. You can invest up to £200,000 into the scheme each tax year. This can be done either directly with eligible companies or with investment funds focused on these companies.
This month, the government extended tax breaks for these schemes, which were due to end in April next year, for 10 years until April 2035. In a social media post, Chancellor Rachel Reeves said: “We are taking further steps to support the UK’s thousands of start-ups and entrepreneurs… boosting innovation, creating jobs and stimulating the economy.” said.
SEIS investors receive a 100% tax relief on profits earned on the sale of qualifying companies, as well as an additional 50% income tax relief. Importantly, if you use the proceeds to invest in a SEIS company, you will also receive a 50% discount on your capital gains tax (CGT) liability on the sale of another asset (such as a buy-to-let property).
With a CGT raid likely to take place in next month’s Budget, benefits like this are even more valuable. Wealth Club’s Nicholas Hyett said: “Capital gains tax, inheritance tax and pensions are all candidates for budget reform, so not only do we offer up-front tax breaks for wealthy investors, but there is also the potential for protection. It’s no wonder they take advantage of the system.” You will also receive tax benefits in the future. ”
CGT is payable on profits from the sale of most assets, including non-taxable investments such as Isas and property that is not your home base. The CGT rate is 10 per cent for basic rate taxpayers and 20 per cent for higher rate taxpayers (or 18 per cent and 24 per cent for assets) on profits earned above the £3,000 annual limit.
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Let’s say you sell a property and make a profit of £100,000. Higher rate taxpayers will pay £24,000 in CGT (assuming they have already used up their £3,000 allowance). Investing this £100,000 of profits into a SEIS-eligible fund or company would reduce your CGT liability by 50 per cent, cutting your bill in half to £12,000. You could also potentially have £50,000 reduced from your income tax bill for the tax year (50% of the £100,000 you invested).
This means your £100,000 SEIS investment will actually cost you just £38,000. Additionally, any profits you make on your investments are exempt from CGT.
Tax breaks for investors are aimed at offsetting the risks of supporting start-ups. There are no official figures on the number of bankruptcies for SEIS companies, but some estimates suggest that around half will go bankrupt within five years.
Of course, some companies will succeed, like Swytch Bike, which makes kits that turn standard bikes into electric bikes, Olly’s snack company, and nutritional supplement maker Hunter & Gather.
You must continue investing for at least three years to benefit from the tax break. If the company goes bankrupt or is acquired within that period, you will have to pay back a portion of the tax deduction you claimed at the time of your investment.
other options
Enterprise Investment Schemes (EIS) offer less generous tax breaks, and investments in these have fallen by 26% since the start of the year, according to Wealth Club. EIS supports large businesses with 250 employees and total assets of up to £15 million.
Typically, you can invest up to £1 million a year in an EIS and receive up to 30 per cent income tax relief on your investment. Profits are tax-free. However, unlike SEIS, you cannot use this scheme to reduce your CGT bill from profits earned elsewhere, but you can defer paying tax.
If a high-rate taxpayer invests £100,000 of their capital gains in an EIS company, they will only pay £24,000 in tax when they sell their EIS investment. You will also receive income tax relief of £30,000 in the year the investment is made. Investments must be held for at least three years to qualify for the tax break.
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Another tax-efficient investment option is a venture capital trust (VCT). They also offer tax relief of up to 30% on investments in early-stage companies, as well as tax-free dividends and CGT relief if the value of the shares increases. Spread your risk by investing through funds rather than investing directly in companies.
These schemes are all aimed at high net worth individuals (usually those with an annual income of over £100,000 or investment assets (excluding the main house) of £250,000 or more) and require regulated financial advice to be used. be.
“It’s not suitable for investors who are risk-averse or who don’t intend to stick with their investments for the long term,” said Jason Holland of asset management firm Evelyn Partners. Each scheme has a minimum holding period to maintain income tax relief, but in the case of an EIS or SEIS this is not practical as these are private companies and are therefore dependent on whether they can be sold. should not be interpreted as a time when you can sell. When it comes to business buyers, you can’t control the timing.
“Investments in such niche schemes should only form a small part of a broader portfolio of mainstream investments.”
It is important to be aware of not only the risks, but also the fees, which are usually much higher than other investment funds. Advisors can also earn commissions by selling them.
One of the largest SEIS funds available through Wealth Club is the Startup Funding Club, which has funded around 20 companies, including antibiotic developer Metallobio, described as a “spin-out from the University of Sheffield”, and pensioner Penney. has invested in technology startups. Summary service. The minimum investment is £10,000 and the initial fee is 2.5%, part of which goes to Wealth Club.
Fund management fees are an additional 1% and are capped at 3.5% for the life of the fund. Additionally, there is a performance fee for any profit that exceeds 25% of the initial investment.
“Tax incentives could be even more valuable.”
Ronald Bracey has invested around £1 million in tax-efficient investment schemes. Ms Bracey, 65, a clinical psychologist from Bradford-on-Avon, near Bath, uses them to diversify her portfolio and take advantage of tax breaks.
“One of the reasons I use them is because they have great tax benefits, and they could become even more valuable after the budget passes,” he said.
In addition to owning ordinary funds and company stocks through self-invested personal pensions and Isa, they also invest in funds and private companies through wealth clubs. “It’s like being in a dragon’s den. You basically have an entrepreneur pitching you shares in your company in exchange for an investment. But regardless of the tax benefits, you’re convinced it’s worth it.” We need to,” Bracey said.
Some of the companies he supports include medical company Inotec, which makes a healing gel called Natrox, and online marketplace OnBuy.
“It is very important to understand that these are high-risk, specialist schemes that invest in illiquid, small, early-stage UK companies and are therefore completely unsuitable for the vast majority of investors.” said Bracey.
