The tax man has given an unexpected boost to business backers pumping cash into start-ups through the Seed Enterprise Investment Scheme (SEIS).
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In a ruling effective from October 23, 2013, anyone raising their SEIS cash from selling other assets during the current tax year will have a capital gains tax exemption of up to £50,000.
While making the announcement, HM Revenue & Customs also confirmed that SEIS conditions that ruled out start-ups through off-the-shelf companies would be amended to remove the restriction.
The CGT reinvestment relief was part of the original SEIS tax break starting in April 2012 announced by Chancellor George Osborne, but was not carried over into the current tax year.
The HMRC announcement brings SEIS investments in the 2013-14 tax year into line with the previous tax year.
Tax reducers
However, the CGT relief only applies to the amount of the asset disposal that is reinvested into SEIS.
At the same time, regardless of how the cash investment was raised, the SEIS investor also receives up to £50,000 relief on income tax paid in the tax year regardless of their marginal rate of tax.
Combined, the CGT and income breaks make SEIS a formidable tax reducer for investors in start-up businesses.
Osborne introduced SEIS to encourage risk-free investment in small new-start businesses struggling to raise cash from the banks die to the credit squeeze.
The maximum SEIS investment in a tax year is £100,000, with the option of another £50,000 over the following two-years.
SEIS investments last for three years. At the exit, any profits on SEIS stakes are tax-free. If the SEIS makes a loss, the investor can set off the amount against other income.
Community projects
Figures from HMRC estimate around 2,000 start-up companies have opted to join the SEIS scheme since April 2012.
Many entrepreneurs are looking at a combination of SEIS and crowdfunding to raise cash for their new businesses.
Many SEIS start-ups are in the technology or pharmaceuticals sectors backed by universities.
Other projects have included community groups buying their own village pubs.
“The CGT initiative is aimed at encouraging more investment into SEIS,” said an HMRC spokesman. “SEIS is already a success but we want to encourage more investors to benefit from the tax breaks.
“Lifting the restriction on off-the-shelf companies is really just tidying up the legislation to make things a little easier for start-up businesses.”
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