In his Autumn Statement last week, Chancellor George Osborne unveiled the Seed Enterprise Investment Scheme (“SEIS”) which is designed to encourage investment in business start-ups.
From April 2012, investors (or “business angels” as they are known) who invest up to £100,000 in a qualifying business start-up will be eligible for income tax relief at 50%. The scheme is open to individuals regardless of the rate they pay income tax at. SEIS will also be available to companies, giving them the same tax relief for investments up to an aggregate total of £150,000.
To attract investors to participate in the SEIS, the Chancellor also announced that for one year only, the government would waive any tax on capital gains that are reinvested into business start-ups eligible under the SEIS. The capital gains tax exemption would apply to gains realised on disposal of an asset in 2012-2013 and invested through SEIS in the same tax year.
Certain conditions must be met before a business can participate in the SEIS. Amongst other things, the investment needs to be in an unquoted business and one which is undertaking a new business. It was also revealed that the rules on “connected persons” and the definition of shares that can qualify for relief will be relaxed.
However, the government confirmed that it would tighten the focus of the scheme by introducing tests to prevent companies being set up simply to gain access to the relief, to exclude the acquisition of shares in another company and exclude investment in Fee-in-Tariffs businesses.
The 50% income tax relief combined with the capital gains tax exemption can potentially result in an overall tax relief at up to 78% for investments made in the next tax year. With such unprecedented relief being offered to business angels, the proposed reforms to EIS will be welcomed by new small and medium enterprises seeking to boost their capital.