Investor Tax Relief Schemes and Alternative Funding Options
For early-stage companies, securing equity finance is critical for growth. To encourage this investment, several tax-advantaged schemes exist to lower the risk for investors while providing essential capital to businesses. These schemes, alongside alternative funding methods like angel investment and crowdsourcing, create a diverse ecosystem for business financing.
Key Facts
- EIS provides 30% income tax relief and capital gains tax exemptions.
- SEIS offers a higher income tax relief of 50% for higher-risk small companies.
- VCTs are HMRC-approved companies that invest in small unquoted companies, offering income tax relief on subscriptions up to £200,000.
- SITR supports social enterprises through income tax and capital gains relief for investments made on or after 6 April 2014.
- Business Angels provide capital in exchange for ownership shares, meaning sole traders and partnerships are generally ineligible.
- Crowdsourcing leverages the internet to raise small amounts of money from a large number of people.
Government-Backed Tax Relief Schemes
The UK government provides several schemes to incentivize investment in small, growing companies by reducing the tax burden on the investor.
Enterprise Investment Scheme (EIS)
The Enterprise Investment Scheme is designed to help companies in their early growth stages raise equity finance. Qualifying investors can claim income tax relief of 30% and are exempt from capital gains tax when the shares are eventually disposed of.
Seed Enterprise Investment Scheme (SEIS)
The SEIS is specifically tailored for higher-risk small companies in their earliest stages. To further encourage investment in these volatile ventures, the SEIS offers a more generous income tax relief of 50%, in addition to capital gains tax relief.
Venture Capital Trust (VCT)
A Venture Capital Trust is an HMRC-approved company that invests in or lends money to small unquoted companies. VCTs themselves are exempt from Corporation Tax (CT) on chargeable gains. Meanwhile, individual investors in a VCT can claim income tax relief on subscriptions up to a maximum of £200,000.
[ไม่มีภาพประกอบ]Social Investment Tax Relief (SITR)
The Social Investment Tax Relief scheme encourages investment in social enterprises. It allows debt investments into asset-locked bodies—such as community interest companies—to receive the same tax relief terms as equity investments under the EIS.
Income Tax Relief
Investors (regardless of UK residency) who make qualifying share or debt investments in a social enterprise meeting SITR requirements can claim 30% of the invested amount. This is capped at a maximum investment of £1,000,000 and must be claimed up to five years after the 31 January following the tax year of investment.
Capital Gains Hold-over Relief
This relief allows investors to defer tax on a capital gain from any disposed asset if those gains are reinvested into SITR-qualifying shares or debt. This applies to gains arising between 6 April 2014 and 5 April 2019, provided the investment is made one year before or three years after the gain occurred.
Capital Gains Disposal Relief
If an SITR investment is held for at least three years, any gain made upon its disposal is free from Capital Gains Tax. This benefit is available in addition to the initial income tax relief on the cost of the investment.
Alternative Funding Methods
Beyond government schemes, entrepreneurs often look to private investors or the general public to fund their ventures.
Business Angels
Business angels are high-net-worth individuals or groups who invest their own funds into a startup or private company in exchange for a share of ownership. Because this involves equity, businesses operating as partnerships or sole traders are typically not eligible for angel finance.
Crowdsourcing
Crowdsourcing involves raising small monetary contributions from a large number of people, usually via online platforms. For-profit platforms may use a "keep what you raise" model with a premium charge or an "all-or-nothing" approach with minor fees. Conversely, non-profit organizations like Razoo facilitate social crowdsourcing for charitable causes, student organizations, or social enterprises.
[ไม่มีภาพประกอบ]Comparison of Investment Schemes
| Scheme | Primary Target | Income Tax Relief | Key Benefit |
|---|---|---|---|
| EIS | Early growth companies | 30% | CGT exemption on disposal |
| SEIS | Higher-risk small companies | 50% | Higher initial tax relief |
| VCT | Small unquoted companies | On subscriptions up to £200k | VCT is exempt from CT on gains |
| SITR | Social enterprises | 30% (up to £1m) | Relief for debt in asset-locked bodies |
Frequently Asked Questions
What is the main difference between EIS and SEIS?
The primary difference is the level of income tax relief; EIS offers 30%, while SEIS offers 50% to encourage investment in higher-risk, very early-stage companies.
Can non-UK residents claim SITR income tax relief?
Yes, investors do not need to be UK residents to claim the 30% income tax relief on qualifying SITR investments.
Who is ineligible for business angel funding?
Businesses that operate as sole traders or partnerships are usually not eligible because business angels require a share in the company's ownership (equity).
How does the SITR capital gains hold-over relief work?
It allows investors to defer paying tax on a gain from a disposed asset if that gain is reinvested into a qualifying SITR share or debt investment, provided the gain occurred between 6 April 2014 and 5 April 2019.
What are the two common models used by for-profit crowdsourcing companies?
They typically use either a "keep what you raise" model, which charges a premium, or an "all-or-nothing" funding approach with minor charges.