Government increases tax relief for start-up investors

The Statement (98-page / 3MB PDF) is the Government's update on its spending plans in the light of new economic data produced by the Office of Budget Responsibility (OBR).

Chancellor George Osborne announced the creation of a new Seed Enterprise Investment Scheme (SEIS) that he said would encourage investment in start-ups. The plans allow for an increase in tax relief for investors but also contain a pledge to "tighten the focus" of the existing EIS rules.

"SEIS will provide income tax relief of 50 per cent for individuals who invest in shares in qualifying companies, with an annual investment limit for individuals of £100,000 and cumulative investment limit for companies of £150,000," said the Statement.

Under the current Enterprise Investment Scheme tax relief is available at a rate of 30%. There are other likely differences between the two schemes according to Chris Thomas, a tax law expert at Pinsent Masons, the law firm behind Out-Law.com.

"The announcement of the new relief for seed funding is a welcome development," he said. "We have very little detail as to how it will work in practice although, based on the earlier consultation, we can expect the relief to be more narrowly targeted than EIS – focussing on business angels investing in start-up companies."

"On the other hand, however, it is anticipated that the qualifying conditions will be more flexible than the famously complicated EIS rules and, interestingly, it appears that investors will benefit from a 50% rate of relief regardless of whether they are actually a 50% taxpayer," said Thomas.

The Government said that it would change other aspects of the EIS schemes and change some aspects of the Venture Capital Trusts (VCTs).

"The Government will simplify the EIS by relaxing the connected person rules and the definition of shares that qualify for relief," said the Statement. "The Government will tighten the focus of the schemes by introducing a new test to exclude companies set up for the purpose of accessing relief, exclude acquisition of shares in another company and exclude investment in Feed-in-Tariffs businesses. In addition to these changes that were consulted on, the Government will remove the £1 million investment limit per company for VCTs to reduce the administrative burdens of the scheme."

"As regards the existing EIS and VCT reliefs, the removal of the £1m investment limit for VCT will be widely welcomed, as will the promised relaxation of the connected person rules, which are full of traps for the unwary," said Thomas. "However, the reference to 'tightening the focus' of the regimes is a more ominous development – we will have to wait and see how far this tightening extends but, as ever, the concern will be that the changes will also catch 'innocent' transactions.”