There are a range of tax incentives to encourage Entrepreneurs to invest in trading businesses both on entry and on exit. These include but are not limited to:
Seed Enterprise Investment Scheme
Aimed at investments into new ordinary shares in start ups as defined by its terms. 50% income tax relief is granted for investments of up to £100,000 that qualify for SEIS. A Capital Gains Tax (CGT) exemption is granted if the investment is held for at least three years. The investor must not be an employee, unless a director, and cannot hold 30% or more of the company. There are anti-avoidance tests to be passed. The company itself may not receive more than £150,000 in total investment under the SEIS and must have been trading for less than two years at the date of issue of the SEIS shares. The funds raised by the SEIS must be spent on a qualifying business activity within three years of the date of the share issue.
Enterprise Investment Scheme
Aimed at investments into new ordinary shares in unquoted trading companies under its terms 30% tax relief is granted for investments of up to £1m that qualify for EIS. A CGT exemption is granted if the investment is held for at least three years. The investor must not be an employee including a director, and cannot hold 30% or more of the company. There are anti-avoidance tests to be passed. The company itself may not receive more than £5m in total investment under the EIS.
Entrepreneurs' Relief (ER) is available on the material disposal of business assets that includes a disposal of shares in a company. In order to qualify for ER the company must be the individual's company for a period of 12 months prior to the disposal. The definition of this is that the individual must have held at least 5% of the ordinary share capital, that holding gave him at least 5% of the voting rights in the company and that the individual was an officer or employee of the company.
The ER capital gains tax exemption is £10 million for the year ending 5 April 2017. An individual can make claims for ER on more than one occasion, up to the current lifetime limit of £10 million of qualifying gains. The rate of CGT for gains qualifying for ER is 10% for the year ending 5 April 2017.
Note that a holder of EMI shares does not have to satisfy the 5% personal company rule when he disposes of his shares.
External Long term Gain Relief in Unlisted Companies
Entrepreneurs' Relief (ER) will be extended to external investors in unlisted trading companies. This new investors' relief will apply a 10% rate of CGT to gains accruing on the disposal of ordinary shares in an unlisted trading company held by individuals, that were newly issued to the claimant and acquired for new consideration on or after 17 March 2016, and have been held for a period of at least three years starting from 6 April 2016. A person's qualifying gains for investors' relief will be subject to a lifetime cap of £10 million.
Please note that while the basic concepts are straight forwards, as always there is no such a thing as tax simplification and Government continues to tinker with the legislation and therefore there are many pitfalls to be aware of. If you would like assistance in helping you through this and ensure your reliefs are maximised please do contact us.
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