With Brexit on the horizon, the government is offering generous tax incentives to make sure the UK is a great place for start-ups. Any start-up with a place of business in the UK can benefit and with tax breaks for different stakeholders, there has never been a better time to start a new business. Whether you are an external investor, business owner, or employee you may never need to pay tax at the full rate.
Enterprise Investment Schemes
The EIS scheme provides qualifying businesses with growth capital through equity investment and is beneficial to private investors who pay income tax. Investors can earn 30% tax relief on investments. The new allowance will mean investors can earn up to £600,000 in tax relief, up from £300,000. EIS investments are also capital gains free if held for at least three years.
Companies can qualify for the EIS scheme if they’ve been trading for at least four months and have no more than £15m in assets and fewer than 250 full-time equivalent employees. The company must not be listed or have any intention of becoming listed at the time of the investment.
Some specific industries such as financial services and property development are excluded from the scheme. The investor may not have more than a 30% interest in the company, and no spouse, partner or associate of the investor may have interests in the company.
Investors’ Relief
Introduced in the Finance Bill 2016, Investors’ Relief (IR) also helps to attract investment into businesses by offering tax breaks for private investors who are neither officers nor employees of the start-up. The tax relief requires individuals to hold shares for a minimum of three years, which allows them to pay tax on eligible gains from share disposals at a discounted rate of 10%. Investors enjoy this lower rate of tax on lifetime gains of up to £10m. IR is ideal for those that don’t qualify for EIS because they don’t have sufficient income or have exceeded the limits for EIS. IR is similar to Entrepreneurs’ Relief but benefits shareholders who do not work in the business.
Entrepreneurs’ Relief
Anyone planning a new business should make sure it qualifies for Entrepreneurs’ Relief (ER). ER enables business owners to save a huge amount on their tax bill when they sell the business. Under the scheme entrepreneurs pay just 10% in Capital Gains Tax. Entrepreneurs must be employed by the company and own at least 5% and have at least 5% of the voting rights. Business owners can claim up to £10m over their lifetime under the scheme.
The Enterprise Management Incentive
The Enterprise Management Incentive (EMI) is a tax-advantaged share option scheme designed to help small companies reward and retain valued employees. If both the employee and employer conditions are fulfilled, options can be granted over shares to employees (worth up to £250k for each employee) without giving rise to income tax at the date of grant or on exercise of the options.
Employees can effectively purchase shares in the company for a discounted value – the market value of the shares when the options were granted – as hopefully when the options are exercised the market value of the shares will be much higher. When the shares are eventually sold by the employee they will be liable for Capital Gains Tax (CGT) on any gain over the market value at grant and may also qualify for Entrepreneurs’ Relief, meaning an effective CGT rate of 10%.
EMI qualifying companies have gross assets of no more than £30m, have fewer than 250 full-time equivalent employees and participate in a qualifying trade (non-qualifying activities include: investments in land, financial services or property development). To qualify employees must work more than 25 hours per week and can’t hold more than 30% of the company’s shares.
Planning ahead
Tax consultants can help you to make the most of these incentives but it’s also simple enough to do yourself with a bit of planning and admin.
When you start your business put in place an EMI scheme for your senior managers and key employees. Don’t forget to make sure that you are paid as an employee and keep a large enough ownership stake in the business to qualify for Entrepreneurs’ Relief.
It is worth exploring whether the Research and Development (R&D) expenditure credit could help fund your product development costs – this increased from 11% to 12% in January 2018, giving qualifying companies greater support for new initiatives.
With the UK’s generous tax reliefs it is a great time to attract investment from individuals – whether investors take advantage of EIS or SEIS (investors who have taxable income), or Investors’ Relief (for those who don’t have much taxable income or who are investing larger amounts).
At Vie Carratt we work with start-ups to create compelling business plans and investor decks that attract external investment. We also advise companies on relevant fundraising schemes and help them to successfully pitch to investors.
If you have a business idea and are looking to attract investors, please get in touch to find out more about the services we offer.