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 2019/20):
- Social Investment Tax Relief (SITR): 30% relief on up to £1 million
- Enterprise Investment Scheme (EIS): 30% relief on up to £2 million
- Seed Enterprise Investment Scheme (SEIS): 50% relief on up to £100,000
- Venture Capital Trust (VCT): 30% relief on up to £200,000
If you invest above £1 million under the EIS, the additional investment must be in ‘knowledge-intensive’ companies. 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).
Tax due on capital gains made from selling other assets can be deferred 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.
Unquoted shares acquired on or after 17 March 2016 can qualify for Investors’ Relief, so CGT is paid at 10% if the shares are held for at least three years and disposed of after 5 April 2019.
If you are thinking of investing in one of these schemes, you may want to do so before 6 April 2020 to maximise the benefit.