Tax incentivised investments and how they work

Investing in another business comes with risks, but HMRC introduced some tax incentivised investments that can reduce them, as well as potentially allowing you to benefit from the rewards.

The three main types of schemes are:

EIS – Enterprise Investment Scheme

SEIS – Seed Enterprise Investment Scheme

VCT – Venture Capital Trust

We’ll look at each of them, to enable you to understand them better. The main tax reliefs for these investments are income tax, capital gains tax and inheritance tax.

Enterprise Investment Relief

The income tax relief is based on the amount invested. 30% of the amount invested is knocked off your tax liability, eg, if you invest £50,000, you get a tax refund of £15,000. The disadvantage here is that if your deduction is more than your total tax liability, the excess relief is lost.

Capital gains made on the sale of EIS shares are exempt from capital gains tax. Investments made in an EIS company can be used from other gains made in the same year and the gain can be deferred. This means that you can delay the payment of a capital gains tax by investing in an EIS company.

If the EIS shares are held for more than two years, they can be free from inheritance tax if you die or if you give them away.

Seed Enterprise Investment Scheme

The reliefs are the same as that of an EIS investment, apart from one main point.

The income tax relief under SIES is 50%. So, a £50,000 investment, you get a tax refund of £25,000.

Venture Capital Trust

The tax reliefs for VCTs are less beneficial, however this is usually because there is less risk involved.

The income tax relief on a VCT investment is 30%, like an EIS investment.

Before investments are made in any of these companies, you would need to ensure your investment can be treated for one of these reliefs.

Conditions to comply with

There are various conditions that companies need to comply with before being able to register to be eligible for these reliefs in the shares they issue. However, if you are a business owner and want to consider attracting some new investors, it may be possible to have your company register for these tax reliefs.

Know the risks

There are many tax benefits to these investments. However, there are always risks involved and, therefore, you should seek professional advice first. Speak to your financial adviser or accountant before making investments or taking any action. We are happy to answer questions in future issues. Please send your questions through the Contact Us page on our website.

Chantal Baker, is the director and founder of Champ Consultants Ltd, an accountancy and tax consultancy practice in Caterham. Please follow them on our various social media channels.

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