Venture Capital Schemes encourages individuals to invest in start-ups or businesses in their early stages, and in return, investors can gain income tax relief when supporting these new companies.
It can be quite challenging finding in the most appropriate scheme, especially when you’re new to investing. There are four main types of Venture Capital Schemes:
- Seed Enterprise Investment Scheme (SEIS)
- Enterprise Investment Scheme (EIS)
- Social Investment Tax Relief (SITR) Scheme
- Venture Capital Trusts (VCTs)
Continue reading this guide to discover the requirements and the amount of income tax relief you can potentially receive when investing in companies on different Venture Capital Schemes.
Types of Venture Capital Schemes
There are four types of Venture Capital Schemes, all carrying varying levels of risks upon investment:
Seed Enterprise Investment Scheme (SEIS)
SEIS help a company raise money when it’s starting to trade. Investors who buy new shares into that company can get tax reliefs – but, the SEIS carry the highest risk as investors need to financially support companies at the very beginning of the business lifecycle.
Enterprise Investment Scheme (EIS)
EIS is established to raise money and help a business grow by offering tax reliefs to investors that buy new shares into that company. Companies that tend to qualify for EIS services are generally small, so investing them can come more at a cost.
Social Investment Tax Relief (SITR) Scheme
SITR scheme is designed to help raise money and support the trading activity of a charity, community interest company or community benefit society with an asset locked. Investors must follow the rules of the scheme for at least three years to receive tax relief on shares they have bought or lent to the business. Like with all investments, you need to bear in mind that they’re not always successful.
Venture Capital Trusts (VCTs)
VCTs are listed companies that mainly invest in smaller companies that are not quoted on the London stock market. VCTs offer investors the chance to gain high tax relief when helping small companies expand their business. Although VCTs provide attractive tax benefits, investing in small companies tend to be more risky than large, established companies.
Income Tax relief
Depending on the type of Venture Capital Scheme, there are different percentages of Income Tax relief you can claim from your investment.
SEIS: You can claim back 50% Income Tax relief if you don’t exceed the maximum annual investment of £100,000.
EIS: The highest amount of annual investment you can claim relief is 1 million pounds, or 2 million pounds if at least 1 million pounds of your investment is towards knowledge-intensive companies. If you keep within the maximum annual investment value, you can obtain 30% income tax relief from the total investment.
SITR: You can get 30% Income Tax relief if the annual investment you’ve made is under 1 million pounds.
VCT: You can be granted with 30% Income Tax relief if the value of the investment you’ve gained is less than £200,000 a year.
For SEIS, EIS and SITR, there are two options for when to claim income tax relief. You can either claim tax relief in the tax year you make the investment, or the tax year before you make the investment. The Income Tax relief can only be claimed for the value of income tax you had paid in the UK, and any unused Income Tax relief can’t be added onto future tax years. However, you can only obtain Income Tax relief in the same tax year you invest, if you invest in a VCT.
Requirements of Income Tax relief
When investing in a company on the SEIS, EIS and SITR scheme, there are specific requirements you need to comply with to claim Income Tax relief:
- Claiming Income Tax relief is not permitted if you and your associates (children, parents, spouses, civil partners, grandparents, and business partners) are connected with the company.
- If the company or any subsidiary employ you, you cannot claim Income Tax relief. However, in some cases, this rule does not apply to directors.
- If you hold more than 30% of the company’s shares, rights to assets if the company goes in decline, voting rights and loan capital for SITR, you can’t obtain Income Tax relief.
Capital gains tax relief
The Capital Gains tax is a tax on the profit when you sell an asset that’s increased in value. Luckily for you, investing through a Venture Capital Scheme will allow you to gain capital gains tax relief. For each scheme, there are specific differences of Capital Gains tax relief you can claim.
You don’t need to make immediate capital gains tax payment if you use your gain to invest in a company that qualifies for EIS. All investments must be made between one calendar year before and three calendar years after you sell the asset. But for SITR, deferral relief is limited to investments up to £1 million.
Considering you receive income tax relief on the same investment, you will not need to pay capital gains tax when you sell an asset, and all or some of the gain to invest in shares that qualify for SEIS. Capital Gains tax relief can be applied on 50% of investments no more than £100,000 – thus, the maximum sum you can receive is £50,000.
If you happen to sell an asset, the asset must be sold during the same tax year that you obtain income tax relief on the investment.
Capital Gains Tax exemption
Investing in a company through SEIS, EIS or SITR allows you to be free from Capital Gains Tax when you sell your shares. There are two specific rules you must follow to acquire Capital Gain Tax relief:
The income tax relief you’ve received on the investment should not be reduced or withdrawn at a later date.
During the scheme, you must hold the shares for at least three years.
However, you don’t need to pay for any capital gains tax whenever you sell both newly issued or previously owned shares when investing in a VCT.