Tax efficiencies provide a useful incentive for individuals with funds to invest in these businesses and the following is a reminder of the ways in which this can be achieved. There are well known incentives and others which are less obvious:
Enterprise Investment Scheme (EIS)
This well-known relief allows individuals to invest up to £1m per annum in qualifying companies and receive a deduction of up to £300,000 in their tax bill. Additionally, the shares could be exempt from future capital gains tax and, if owned for two years, inheritance tax.
Seed Enterprise Investment Scheme (SEIS)
This new relief has been available since April 6, 2012 and allows up to £150,000 to be invested in startup businesses with a deduction of up to ?75,000 available against tax. This is in addition to the exemptions for capital gains and inheritance tax as described above.
Furthermore, any gains arising in 2012/13 can be rolled into the investment and will fall away from ever being chargeable. That means tax relief of up to 78 per cent could be due and could even be as high as 100 per cent if the investment fails and tax relief is given for the loss at the new top rate of tax of 45 per cent.
Business Investment Relief for non-UK domiciled individuals
Another new relief since April 6, 2012 allows non-UK domiciled individuals to bring overseas income or gains into the UK without being taxed, provided they investment in UK trading companies.
This is a significant source of potential funding with many non-UK domiciled individuals retaining funds outside of the UK, either in their own name or via an overseas trust structure, who would have been taxed had they or their trust brought these funds in the UK.
The changes in rules means that no tax will now be due on the remittance where the investment is into any private UK trading company, either as debt or equity. Combining this with tax relief under either EIS or SEIS can result in major incentives, for the first time, for non-UK domiciled individuals to invest in UK business.
Finally, a look around the family could provide some opportunities for investment. Many pensioners are concerned about the low rate of interest on funds but an investment by them, in a family company, could bring a higher rate of return and an exemption from inheritance tax.
Business Property Relief exempts shares in private trading companies from inheritance tax once held for two years and structuring these shares as preference shares with a fixed coupon can provide a healthy return with preferential rights should the company fail, funding for a family business and tax free passing of assets to the next generation.
Investing in any company comes with risk and more so the smaller and less established the business. With traditional bank funding difficult, some individuals may be happy to take the risks of investing in private companies where the sweetener provided is tax relief. Businesses should take time to look at these alternatives and make their companies attractive to potential investors.
Gary Heynes is a partner at Baker Tilly.