Tax doesn’t have to be boring – honest! Are you aware of the truly incredible tax breaks available to people who want to invest in young companies which can, in some cases, totally mitigate your risk to zero? Jude explains why in today’s post on the blog.
In recent years, research has shown that investing in high-growth companies is one route towards returns that are significantly greater than those available elsewhere. You have to be comfortable with the risks that are inherent in investing in young companies but equity crowdfunding can present a very attractive option for investors.
But if you’ve relied on fund managers to place your money (which, as I’ve mentioned elsewhere before is often not a good idea), you’re probably not aware of the incredible support that the tax system currently provides to early-stage investors.
By investing and claiming SEIS tax relief (Seed Enterprise Investment Scheme), you reduce the amount of income tax you pay. Or, to put it another way, HMRC let you have part of your income tax-free – your income tax bill is reduced by 50% of your investment.
So if you invest £10K whilst claiming SEIS relief, you get £5k knocked off your income tax bill.
But that’s not all.
When you sell shares, you usually pay tax (currently 28%) on the amount that the shares have increased in value whilst you owned them. But with an SEIS investment, provided you’ve held the shares for three years, you don’t have to pay that capital gains tax – potentially another huge saving.
Many young companies will fail and go bust. It’s an essential part of the process. But given that these businesses are crucial for innovation, jobs and growth within our economy, the tax system offers a further incentive to entice people to invest money in them.
If the company you’ve invested in fails, you get even more tax relief. Remember you’ve already used 50% of your investment to reduce your income tax bill? Now you can use the other 50% of your investment – multiply this by your marginal tax rate (e.g. 50% of your investment x 45% = 22.5% of your investment). Add this to your original income tax relief (50%). The result? A high rate tax payer now has 72.5% of his or her investment protected.
But that’s not all.
If you’ve happened to have made a capital gain (on anything – eg property,shares etc), you can also add the 28% tax you should be paying to the total reliefs (income tax relief of 50% of your investment plus loss relief of your marginal tax rate multiplied by 50% of your investment). Add all that up (28%, 50%, 22.5%) and a high rate taxpayer is protected to 100.5%.
Read that again – 100.5%. It’s a zero risk investment! The government is effectively underwriting your risk. You can now see why SEIS has been called “the world’s most generous scheme for angel investors” by noted angel investor Dale Murray.
It used to be the case that it was only business angels that could ever take advantage of these kind of benefits for one simple reason – they were the only ones who knew where to find the deals (via angel syndicates or angel networks). Discovering the opportunities was always a challenging part of any active business angel’s investment strategy.
Yet the world has now moved on apace and crowdfunding provides the platform for young companies to publicise their businesses. They can publicise their requests, those with the strongest potential can now actively raise their profiles to investors who remain on the look-out for the best opportunities. And with the gates now being opened up, suddenly lots of people – and not just established business angels – have the opportunity to get in on the act and invest in high-growth businesses.
However, be aware, SEIS won’t be around forever. It’s already been extended and, the limits post April 2014 are lower. Of course, there’s also EIS (the Enterprise Investment Scheme) tax relief available which is also very generous (30% not 50% though) you can read more about in a previous blog post.
It all adds up to one simple fact: there’s never been a better time to invest in early-stage companies in the UK.