Small and medium sized businesses raised a record £5.7billion in equity finance in 2018. According to the British Business Bank’s Small Business Equity Tracker report, the UK equity investment market has grown by 72% in two years. Interestingly, the value of equity finance investment outside London increased by 29%, while the technology sector attracted the highest proportion of equity investment.
For any business that is considering raising equity finance, it is important to understand to the tax relief benefits that are available to investors.
Making equity finance attractive to investors
For most start-ups and early stage businesses equity finance will provide a valuable source of raising the needed finance. To make an investment as attractive as possible to any potential investor, the company must have an attractive commercial proposition. The business should also ensure the investor can benefit from available equity as investment reliefs can be vital to encourage investment.
What reliefs should investors consider?
The most relevant reliefs for investors to consider are under the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS). These schemes provide the following benefits for investors who subscribe for cash in new shares:
• A deduction against the investor’s income tax liability of 30% (EIS) / 50% (SEIS) of the amount invested in the year of investment or the preceding year, subject to investment limits.
• A capital gains exemption on any growth in value on the investment if the shares are held for a minimum of three years.
• If the investment results in a capital loss then the loss can be claimed against the investor’s taxable income, when the loss arises.
For investors to qualify for these valuable reliefs the company has to meet certain requirements. The most important of these are:
• The company must be carrying on a qualifying trading activity.
• The purpose of raising finance has to be for the benefit of the trade, and the money raised used within two years of raising funds.
• The issuing company must get approval from HM Revenue & Customs to be able to issue the relevant certificates.
• The investor has to be unconnected to the company. This means they must own less than 30% of the issued share capital after the investment and they cannot be an employee or director of the business issuing the shares (except that a director can benefit from SEIS).
What is EIS tax relief?
The Enterprise Investment Scheme (EIS) provides tax incentives to investors who invest in smaller, unquoted, trading companies. Investors can claim back up to 30% of the value of an investment in the form of income tax relief.
The tax rules around EIS / SEIS are very prescriptive, so it is easy for a company to miss a compliance hurdle during an investment process, which can deny an investor a valuable relief. We would therefore always recommend seeking advice before publicising to investors that EIS / SEIS reliefs are available.
If you would like to find out more about EIS / SEIS or how Thomas Westcott can obtain the necessary paperwork from HMRC for investors, please contact me or your usual Thomas Westcott office.
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