Interactive Investor

Budget 2013: Generous tax breaks extended for investors in start-ups

20th March 2013 15:42

Andrew Pitts from interactive investor

The generous tax breaks offered to investors in a Seed Enterprise Investment Scheme (SEIS) are to be further extended into the 2013-14 tax year and beyond, marking an unexpected victory for investors and promoters of SEISs.

Jeff Lynn, chief executive of SEIS promoter Seedrs, said: "The extension of the CGT [capital gains tax] holiday is a tremendous victory for investors in early-stage businesses - and was very much an 11th-hour decision from No. 10 and the Treasury following intensive lobbying from the industry."

Legislation will be introduced in the Finance Bill 2013 to extend CGT reinvestment relief for reinvestment in a SEIS-qualifying start-up, but they are not as generous as the current allowances.

Instead of CGT reinvestment relief being available on the full reinvested amount in this tax year, next year it will be cut to half the reinvested amount (provided gains are reinvested during 2013-14 or 2014-15). However gains realised in the current tax year and reinvested next year will still qualify for full reinvestment relief.

The other major tax break remains untouched: 50% upfront income tax relief on a maximum annual contribution of £100,000, regardless of your income tax band.

Derek Uittenbroek, co-founder and chief executive of FundTheGap, said: "We are delighted to find out that the SEIS capital gains tax holiday has been extended. This will continue to ensure that innovative start-ups in Britain have access to the private funding they need to get off the ground."

SEIS is an extension of the Enterprise Investment Scheme (EIS), which also offers tax reliefs to investors in higher-risk small companies. However the higher tax breaks available on SEIS are designed to compensate for the difficulties that very early-stage companies face in attracting investment and the higher odds of failure.

Mark Payton, managing director of Mercia Fund Management, added: "We still want to see the government lift investment limits for SEIS to small to medium enterprises from the current £150,000 in total to £500,000, and allow investors to invest £200,000 (versus the existing £100,000) per annum via SEIS. Raising SEIS investment limits will direct needed and effective capital to a sector devoid of support from many investors and a majority of the banking community."

How the tax breaks work in the 2013-14 tax year

Invest £1,000 and HMRC will give you £500 back on your tax return. On top of this, if you sell another investment that would be liable for CGT, you can write off half the CGT you would have otherwise paid. That means a £1,000 investment in a SEIS-eligible start-up attracts 64% tax relief just for making the investment (in the 2012-13 tax year it is 78%).

Lynn points out that when investors hold the shares for three years, and the company continues to comply with SEIS rules, reliefs are also available on disposal. "If you sell at a profit, you pay no CGT. And if you sell at a loss, you can claim loss relief, which means that if you are a 45% rate taxpayer, you would be entitled to a further 22.5% off your tax bill."

Add together the 64% total upfront relief and 22.5% loss relief, and the total tax break comes to 86.5% of your investment - which is quite generous downside protection, and there is potential 100.5% protection for investors who realise chargeable CGT gains in the current tax year.

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