Tax relief for successful investors
Investing in unquoted companies is risky, because you can lose everything you put in, as discussed below. If the investment pays off and you make a capital gain, you may want to be rewarded with a nil or low tax rate on that gain.
Entrepreneurs’ relief provides a 10% rate of Capital Gains Tax (CGT), but to qualify you need to be closely involved in the company you invest in, as a director or an employee. You also need to hold that position on the day you sell your shares and for at least the previous 12 months.
If you are not going to be involved on a day-to-day basis with the company you invest in, try to acquire your shares under the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) (for very small companies). The company must apply for approval to run either of those schemes, and certain property-heavy businesses won’t qualify.
When HMRC give approval for the scheme you can claim an income tax credit equal to 30% (EIS) or 50% (SEIS) of the amount you invested. You must have a big enough tax bill to soak up this credit. When you dispose of your shares, after three years or more, there will be no CGT to pay on any capital gain, as long as the strict conditions for the scheme have not been broken in the first three years.
If the company doesn’t want to jump through the hoops of EIS or SEIS, you may still qualify for the lower 10% rate of CGT when you sell your shares after 5 April 2019, using Investors’ relief.
The company must be trading, but otherwise there are no restrictions on its activities. You must not be connected with the company as an officer or employee, or be related to anyone connected to the company.
Let’s discuss the conditions necessary to reduce the tax payable on a successful investment before you buy those shares.