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What tax reliefs are available when investing in UK startups?

The opportunity for exponential growth leads many into startup investment.

Backing early-stage firms also enables investors to share their expertise, and for those impact-driven companies, helps to solve some of the world’s problems.

But although the potential for returns in every sense are great, the level of risk attached to startup investment is higher than other asset classes - yet in the UK, some of this risk can be mitigated through the government provision of tax reliefs and incentives.

Designed to encourage investors for supporting enterprise – and its many positive spin-offs like job creation and innovation - they offer many attractive incentives towards angel investing.

And currently, there are two main schemes that UK startup investors can benefit from - the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).

Enterprise Investment Scheme (EIS)

The EIS was launched in 1994 to boost investment in small and higher risk - due to them being relatively early-stage - firms in the UK.

It offers tax relief of 30 per cent of the cost of shares set against the investor’s income tax liability for the year in which the investment was made.

Relief may be claimed on up to £1m invested in shares, with a maximum possible tax reduction at £300,000, although this can be doubled for investment into knowledge-intensive companies.

Read more: investing via EIS - what are knowledge intensive companies?

Figures published up to the end of the 2016/17 tax year show that over £18bn of funds have been raised through the scheme since it was launched. This has supported over 27,900 businesses. The latest annual stats, from 2016/17, show that the information and communication sector was the biggest recipient of EIS investment, representing 37 per cent of all deals, worth a total of £669m.

With our investor's guide to the EIS providing a full insight into the scheme and the relevant tax reliefs and incentives, the below provides an overview of the key points of the scheme:

  • Tax relief of 30 per cent claimed on investments of up to £1,000,000 in one tax year (excluding the knowledge-intensive focus)
  • Maximum tax reduction in any one year of £300,000, assuming the investor has sufficient income tax liability to cover it (excluding the knowledge-intensive focus)
  • No minimum investment through EIS in any one company in any one tax year
  • EIS allowances allocated individually - married couples could therefore invest up to £2m each tax year and be eligible
  • Shares must generally be held for at least three years from the date of issue to benefit from the available tax reliefs and incentives
  • The individual investor can be a director of the company, but not an employee
  • EIS tax relief applies only to recently incorporated companies
  • Company must have 250 or fewer employees and gross assets of no more than £15,000,000
  • Growth in the value of an investment is not subject to capital gains tax when it is sold
  • Investors should check in advance whether the company has ‘advanced assurance’ - an HMRC certificate confirming that it is EIS eligible
  • Money can be claimed back once the business has traded for four months, or 70 per cent of the investment has been spent
  • It can be claimed up to five years after the 31st January in the year the investment was made

Seed Enterprise Investment Scheme (SEIS)

The SEIS was launched in April 2012 to incentivise investment in early-stage firms, kick-starting UK economic growth by encouraging new enterprises and helping them to grow.

Although aimed at very early-stage companies, it is hugely attractive to startup investors, as they can receive initial income tax relief of 50 per cent on investments, up to £100,000 per tax year.

Further benefit comes from capital gains tax relief. Investors can claim relief against capital gains tax if they reinvest the gain in a qualifying SEIS company, irrelevant of where the gain was made. With up to 50 per cent of the reinvested gain exempt, the investor receives an effective 14 per cent rate of relief. Therefore, the total tax relief on an investment of £100,000 could be worth £64,000.

A maximum 30 per cent stake in the company can be bought, while the startup must be recently incorporated and have no more than £200,000 of gross assets and 25 employees at most.

The latest annual count, in 2016/17, shows that 2,260 startups received investment through SEIS, with a total of £175m funds raised.

As with EIS, information and communications firms dominate, making up 39 per cent of all investments.

Our investor's guide to the SEIS offers an in-depth overview of the scheme and the available tax reliefs within it, but the below details the key points of the SEIS:

  • Investors can receive initial income tax relief of 50 per cent on investments up to £100,000 per tax year
  • Growth in the value of an investment is not subject to capital gains tax when it is sold
  • The individual investor can be a director of the company, but not an employee
  • The investor’s stake in the company can be no more than 30 per cent
  • SEIS tax relief applies only to recently incorporated companies. To qualify, the company must have been trading for less than two years, in a genuinely new trade.
  • The startup must have 25 or fewer employees and gross assets of no more than £200,000
  • Investors with taxable capital gain can halve their capital gains tax liability by reinvesting their taxable capital gain in an SEIS-eligible company
  • As with EIS, investors should check in advance whether the company has ‘advanced assurance’ - an HMRC certificate confirming that it is SEIS eligible
  • Money can be claimed back once the business has traded for four months, or 70 per cent of the investment has been spent
  • SEIS can be claimed up to five years after the 31st January in the year the investment was made

Other tax relief options for startup investors

Social Investment Tax Relief (SITR) is another vehicle which may bring investors and startup founders together. It was launched in 2014 and is the government’s tax relief for social investment, supporting charities and social enterprises.

Investors backing SITR-eligible social enterprises can claim 30 per cent of the amount invested off their income tax.

Read more: it’s a fact - socially responsible, impact-driven investments can deliver long  term returns

Figures published earlier this year show that at least 50 social enterprises have raised a total of £5.1m through the scheme since the 2014/15 tax year.

Social enterprise is growing rapidly in the UK. A 2017 report commissioned by Social Enterprise UK suggests social enterprise encompasses some 70,000 businesses and a £24bn-a-year contribution to the UK economy.

Tax-efficient investing in startups

The array of tax reliefs and incentives available to startup investors in the UK today is fantastic. Some of the most generous you can find for any investment asset class, startup investment without doubt has a higher risk profile than other assets, but the tax reliefs are provided to help mitigate exactly this.

And with the vast array of startups available for investment, accompanied by how seamless it can be to invest in such startups today, you can realistically build out your portfolio with great diversification whilst benefiting from numerous tax reliefs and incentives.

Driving Growth.
Creating Value.
Delivering Impact.

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Growth Capital Ventures (GCV) is backed by funds managed by Maven Capital Partners, one of the UK’s leading private equity and alternative asset managers.