The Government encourages individuals to make high-risk investments in small trading companies or charities by providing income tax relief for investors in the following schemes (limits for 2017/18):
• Social Investment Tax Relief (SITR): 30% relief on up to £1 million
• Enterprise Investment Scheme (EIS): 30% relief on up to £1 million
• Seed Enterprise Investment Scheme (SEIS): 50% relief on up to £100,000
• Venture Capital Trust (VCT): 30% relief on up to £200,000
From 6 April 2018 you can invest a further £1 million in knowledge-intensive companies under EIS, taking the maximum annual investment to £2 million. The amounts invested under EIS, SEIS or SITR can be treated as made in the previous tax year if the investment limit for the earlier year has not been reached.
When you dispose of shares acquired under these schemes, any capital gains you realise will be free of capital gains tax (CGT), if you’ve held the investment for at least three years (except VCTs, where there is no minimum period).
Shares acquired on or after 17 March 2016 that qualify for Investors’ Relief are also free of CGT if they are held for at least three years and disposed of after 5 April 2019.
Where you have already made capital gains you can defer tax on those gains by reinvesting under the EIS or SITR within three years of making the gain. Reinvesting the gain in SEIS shares will halve the tax on that gain if the investment limits and conditions are not breached.
These tax reliefs won’t turn a bad investment into a good one, but they will make a good one better and will reduce the risk involved in investing.
You should take advice from a qualified financial adviser on where to put your money, as well as understanding how it will reduce your tax bill. If you are thinking of investing in one of these schemes, you may want to do so before 5 April 2018 to maximise the benefit.
Are tax-favoured investments worth discussing with your advisers?