Tag Archives: seed enterprise investment scheme

Should I Incorporate My Buy-To-Let Property? – Part 2

Capital Gains Tax

Incorporation comes at the cost of an SDLT charge on transfer of the property into a company and the Capital Gains Tax payable on the transfer. As the company is connected with the seller the CGT is payable on the full market value of the property irrespective of the price recorded in the documentation.

Residential property

When CGT rates were reduced to 10% or 20% on 6 April 2016 the reduction did not apply to gains on disposal of residential properties. The impact is that individuals who incorporate will pay Capital Gains Tax at rates of either 18% or 28% on the gain they make on that property. This “dry charge” is a disincentive for incorporation. However this CGT rate could be reduced to 10% or 20% by investment in Enterprise Investment Scheme (EIS) shares.

Enterprise Investment Scheme

Capital gains on sale of property can be deferred if the vendor invests in EIS qualifying shares. The reinvested gain would be deferred for the period that the shares are held. When the EIS shares are sold the deferred gain becomes taxable at the rate of CGT applying at the time of the share sale. The CGT which is payable is no longer classified as a disposal of residential property but a deferred gain and therefore charged at 10%/20%. Due to a technicality this opportunity only applies to investment in EIS qualifying shares and does not apply to Seed Enterprise Investment Scheme qualifying shares.

As well as CGT reliefs, a qualifying investment in EIS shares which are held for a minimum period of (generally) three years results in a 30% income tax relief for the subscriber.

In summary, one of the concerns about incorporating a buy-to-let business is the Capital Gains Tax which is payable. With the cash resources and the appropriate appetite for risk this concern can be partially alleviated by use of EIS investments.

Seed EIS extension

Leave a reply

The 2013 Budget included an extension of the tax breaks for investment in start-up companies. This announcement has made the Seed Enterprise Investment Scheme (SEIS) even more accessible and attractive to both entrepreneurs and investors.

SEIS is the higher risk alternative to the Enterprise Investment Scheme. The objective is to help the development of smaller, riskier, early stage UK companies, which may face barriers in raising external finance. As a result of the risks in investing in these companies, the tax breaks are more generous, with income tax relief given at 50% of the cost of the investment, up to a maximum annual investment of £100k. The relief is given by way of a reduction to the tax liability, providing there is sufficient tax against which to set it. The requirement for a sufficient tax liability to absorb the SEIS benefit is important given that the highest rate of income tax is now 45% and yet the income tax relief is at 50%.

There was also a capital gains tax relief, which applied to capital gains made before 5 April 2013. The relief meant that capital gains on assets sold before 5 April 2013 would be free of tax if the sales proceeds were invested in a SEIS qualifying company before 5 April 2013. There has been a less generous extension to this relief for capital gains generated in the year ended 5 April 2014 where there is an investment in a SEIS company before 5 April 2014. This extends the total tax relief on SEIS investments to more than half of the cost of the investment.

The tax breaks do not stop at the time of the investment. If the SEIS company is successful and the shares are eventually sold at a profit, any gain will be free from capital gains tax provided the shares have been held for three years. If the company is not successful, further tax relief is available.

The SEIS reliefs are generous due to the high risk nature of the investments. Qualifying investments are shares in unquoted companies with fewer than 25 employees and less than £200k in gross assets. The test of the value of the company’s assets and staff numbers is at a time the qualifying shares are issued. The maximum that the company can raise under the scheme is £150k and the company’s trade, to the extent that the company has started trading, must be less than two years old at the date of issue of the shares. The company must not have carried on any other trade before the present trade. As the relief is for high risk ventures some trades are excluded from qualifying for SEIS status.

The twin benefits of immediate income tax relief and elimination of other gains make SEIS an attractive proposition. However, as the investments are high risk it has to be assumed that there is a strong likelihood that they will fail. They should always be appraised on their investment opportunity rather than as a mechanism to access tax breaks.

Fully approved, fully effective tax avoidance – time’s running out …

Leave a reply

Everyone knows what’s meant by a low risk investment. It’s one where there’s minimal risk of losing any part of your stake. You want safe? – government bonds, National Savings, bank and building society deposits up to £82K. You won’t lose your initial stake, but in the current climate you will most certainly lose value. With the likes of Halifax paying 0.11% on deposits over £25K, and inflation running at around 3%, “safe” has taken on a new meaning – you can sit back and relax as your savings “safely” whittle away to nought.

Probably the last thing anyone would categorise as “safe” is investment in early-stage start-up business. You’re almost guaranteed to lose the lot.

Or are you?

For the “right” investor the extraordinary tax breaks available this tax year ensure that whatever you lose on your investment under the Seed Enterprise Investment Scheme [SEIS] will be more than compensated by the tax savings it offers.

It’s important to understand what’s meant by “right”. First, it’s a taxpayer who’s made a capital gain this year on which tax will be payable. Second, that taxpayer has to have a sufficient income tax liability this year to cover the upfront tax relief SEIS offers. Third, in the event the investment does what you expect – fail – in the year of failure the taxpayer should be exposed to a sufficient level of income tax at the maximum rate to have it mitigated by the availability of loss relief.

An example: Joe has made a capital gain on the sale of a second home of, say, £70K. Because he’s a higher rate tax payer, the CGT bill comes to £16.8K. He will have earned £90Kin the year, on which he’ll be suffering £26K of income tax. Because SEIS investments qualify for a 50% income tax relief, he invests £52K in a SEIS business – precisely to ensure he wipes out his income tax liability . His tax bill on £52K of his gain vanishes, as does his income tax bill. So his £52K investment will actually cost £11.4K.

Joe’s anticipating a significant uplift in his income profile over the next couple of years, such that he’ll be exposed to something over £50K of tax at the highest rate of 45%. When the investment he’s made does what we all expect, and becomes worthless, he gets income tax relief on his loss. For income tax purposes his loss is the initial £52K less the income tax relief he received at the time of £26K – a loss of £26K. He gets tax relief at 45% on that loss, equals £11.7K.

So a high risk investment that cost £11.4K goes sour – leaving him £300 better off.

And of course, there’s always the possibility, however remote, that his investment doesn’t do what we expect, and becomes the next Facebook.

Rather changes the concept of what constitutes a low risk investment.

But this only works for investments made this side of 5th April – so time is running out ……….