Investors are ignoring the Seed Enterprise Investment Scheme (SEIS) because they believe the generous tax breaks are only for the wealthy, says HM Revenue & Customs (HMRC).
Although SEIS offers market-leading tax giveaways, too many small investors are failing to take up the opportunity to pump money into startup businesses.
The appeal for investors to reconsider their options, especially if they have soaked up their ISA and pension contribution allowances for the tax year, comes after HMRC published some encouraging statistics about the scheme.
In 2014, nearly 5,000 investors staked more than £80 million to 1,120 SEIS companies.
Although the maximum annual investment is £100,000, most bought shares worth much less.
“The research shows that the average investor claiming income tax relief puts less than £20,000 into companies that have preapproval as qualifying for SEIS,” an HMRC spokesman told web site SEIS.co.uk.
Only a third of SEIS investors put up more than £20,000 for a startup company.
Finding the right investment is a problem, writes Stuart Smith, as no one publishes a central list of startup businesses looking for SEIS funding.
“Instead investors have to find the proverbial needle in a haystack,” said Stuart Smith.
“Companies pitch in the best place they think they can find money. This can be anything from a crowdfunding site, news lists for venture capitalists or investment platforms.
“Sniffing out the right opportunity can be time consuming.”
But if SEIS investments are difficult to pin down, the rewards once an opportunity is identified can be great.
First year tax reliefs include a reduction on income tax paid up to half the value of the share purchase in a SEIS company. For that average £20,000, that means paying £10,000 less income tax in the year – or the year before if carry-back rules are triggered.
Also on offer in that first year is a capital gains tax exemption of 50% against assets sold to raise cash for buying the shares.
That means half of the cash raised directly for buying shares, not the entire disposal, says Stuart.
“If you sold assets worth £150,000 but only invested £20,000, that exemption extends to half the £20,000,” said Stuart Smith.
Other tax reliefs include tax-free growth on share values in a successful startup and if the deal goes wrong, loss relief against other income.