There weren't many winners from George Osborne's autumn statement. Yet hidden among the bad news is a juicy new tax break for investors. Accountants at Blick Rothenberg call it "astonishing".
From April 2012 the seed enterprise investment scheme (SEIS) will allow individuals who invest up to £100,000 per year in a new start-up business (up to a maximum cumulative investment in one firm of £150,000) to claim back income-tax relief equal to 50% of the amount invested. Moreover, as accountants at Deloitte note, you're eligible for the 50% tax break regardless of the marginal rate at which you pay income tax.
Another eye-catching part of the new scheme is its capital gains tax holiday'. Investors can avoid paying capital gains tax (CGT) on any asset sold during the financial year 2012-2013 as long as they reinvest the proceeds in a SEIS eligible start-up in the same year.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
If this sounds vaguely familiar, that's because it is. The scheme will run alongside existing enterprise investments chemes and venture capital trusts (VCTs). The fundamental difference, other than the tax breaks, is that the SEIS focuses on investing in start-ups. Also, whereas with, say, a VCT you invest into a vehicle that invests in several companies, a SEIS allows you to invest directly into one company. That's pretty risky, hence the generous tax relief on offer.
There are restrictions on the types of firms that are SEIS-eligible. The company must be unquoted, have 25 or fewer employees and assets of up to a maximum of £200,000 at the point of investment. It must also be undertaking a new business. Directors or executives cannot use the scheme to invest in their own companies and HMRC will also run checks to make sure that a business hasn't just been set up to access the relief.
If you can accept these restrictions, this is one of the best tax breaks on offer. The combined effect of the CGT holiday and the income tax break offers relief of up to 78% in the first year.
However, we'd still be wary of piling in. As Bengt Saelensminde notes in his Right Side newsletter: "A tax break can never turn a bad investment into a good one." Studies show that 50% of new businesses fail in the first year and 95% go under within five years. Tax relief isn't much use if you lose all your money. Bengt's advice? "Be damn sure your investment is sound before you commit your cash." That means doing a lot of homework before you decide to put money into it.
