Government confirms new tax incentives for startup investors

Plans to create a new Seed Enterprise Investment Scheme (SEIS) were announced by George Osborne during his Autumn Statement last week, and have now been published (60-page / 546KB PDF) as part of planned tax reforms set out in the draft Finance Bill 2012 (1107-page / 4.22MB PDF).

Under the plans, which are open to consultation until 10 February next year, qualifying investors in newly developed or developing small businesses would be able to claim income tax relief worth 50% of the cost of buying shares in the company under certain circumstances. The businesses would have to have 25 or fewer employees and assets worth up to £200,000 in order to qualify for SEIS.

Under the current Enterprise Investment Scheme (EIS) tax relief is available at a rate of 30%. Investors can also obtain income tax and capital gains tax benefits by buying shares in Venture Capital Trusts (VCTs) – companies listed on the London Stock Exchange that are run by fund managers, who are often members of larger investment groups.

Investors in qualifying SEIS companies would be able to benefit from the 50% tax rate on shares bought on or after 6 April next year provided they hold less than a 30% stake in the company, the proposals said. Investors would each be able to claim the 50% tax relief on annual amounts of investment of up to £100,000, although any "unused annual amounts" could be "carried back" to the previous tax year.

This tax relief would be able to be claimed on investment worth up to £150,000 per company, although "to give the greatest degree of flexibility, this will be a cumulative limit, not an annual limit," the proposals said.

In order to qualify for the tax relief rate investors would have to meet certain other criteria, which includes not being an employee of the business, although directors are exempt from this rule.

Under the plans qualifying investors will be exempt from paying capital gains tax (CGT) "on gains on shares within the scope of the SEIS" and would also benefit from not having to pay CGT for the year 2012-13 "on gains realised from disposals of assets" in that period "where the gains are reinvested through the new SEIS in the same year".

Chris Thomas, a tax law expert at Pinsent Masons, the law firm behind Out-Law.com, said SEIS could provide a valuable incentive for investing in start-up companies.

"The relief is closely targeted at genuine start-ups, and the amount of investment qualifying for relief is quite low - only £150,000 in total for the company, compared to £10 million for EIS from 2012-13," Thomas said.

"However, the 50% rate of tax relief compares very favourably with other schemes such as EIS and VCT. The CGT exemption on gains reinvested into the SEIS shares is also generous, as other schemes only allow the deferral of the gain, rather than exempting it entirely – although this applies for 2012-13 only, so potential investors may wish to time any gains accordingly," he said.

"Other than that, the qualifying conditions for relief will look very familiar to anyone with experience of the EIS rules. It is disappointing, although perhaps not surprising, that the Government has copied over most of the restrictions and complexities applying to that regime, and therefore care will be needed to avoid the various traps which could catch an unwary investor," said Thomas.

In a jointly published document outlining the proposals the Treasury and Her Majesty's Revenue and Customs (HMRC) said the plans would help stimulate growth and encourage entrepreneurship.

"Tax relief is provided to incentivise investment in companies that may face barriers in raising equity finance, including seed level companies," the proposals said.

"This relief will provide a more generous rate of relief than offered under EIS and will increase the incentive for individuals to invest in small companies and help new businesses to establish. This is likely to increase investment in these companies, which will contribute to wider economic growth. Individual investors will be able to access a higher rate of relief than they would if they invested in qualifying companies under EIS or VCTs from April 2012. The scheme will also encourage individuals to become entrepreneurs with the backing of SEIS investors," it said.