Tax relief for investment in UK businesses

The UK tax system offers various tax reliefs intended to encourage investment in UK businesses.

The way in which tax relief is given, and the conditions which must be met, vary widely. Generally, you can only get relief if you invest in a trading company. And if you invest in shares, they usually need to be in an unquoted company (which for these purposes includes an AIM listed company) and held for a set minimum time.

This guide highlights the key tax reliefs but doesn’t cover all the conditions in detail. If you’re non-domiciled and using the remittance basis you might qualify for Business Investment Relief (BIR). For more information, read our article on Business Investment Relief.

Income tax and capital gains tax relief

Enterprise Investment Scheme

The Enterprise Investment Scheme (EIS) gives 30% income tax relief on investments up to £1 million annually in qualifying companies. If you invest at least £1 million in qualifying ‘knowledge-intensive’ companies, the limit increases to £2 million. Where income tax relief has been claimed, shares will be free of capital gains tax (CGT). You can also defer capital gains on other assets by investing them in an EIS investment, with the deferred gain becoming due when you sell the EIS shares.

In addition, losses made on EIS shares can often be set against income rather than capital gains, potentially meaning that if maximum tax relief is obtained then over 60% of the cost of the investment can be covered by tax relief if the investment fails (30% income tax relief and 45% income tax relief for the remainder).

Both the investor and the company receiving the investment must meet certain qualifying conditions for income tax and CGT reliefs to be available. The conditions include:

• Shares must be issued fully paid in cash (an important point, which can easily be overlooked),
• The shares must be held for at least three years,
• You can’t be connected with the company, such as being an employee or director, unless you’re a “business angel” or unpaid director,
• The company must carry out (or be preparing to carry out) a qualifying trade. Certain trades, including property development, leasing, banking, and running nursing homes or hotels, don’t qualify,
• The company’s gross assets must be no more than £15 million before issuing EIS shares (and no more than £16 million immediately afterwards), and it must have fewer than 250 full time equivalent employees when the shares are issued. The employees limit is increased to 500 for knowledge-intensive companies,
• A company generally has seven years from its first commercial sale to obtain EIS funding,
• There are both annual and absolute limits on the amount of venture capital funding that a company can receive,
• Funds raised through EIS must be used to grow or develop the business.

Seed Enterprise Investment Scheme

The Seed Enterprise Investment Scheme (SEIS) is like EIS, but it’s designed for smaller companies. To qualify a company must have gross assets of up to £200,000 and fewer than 25 employees. Reflecting the higher-risk nature of investing in these businesses, you can get 50% income tax relief on up to £200,000 of investment annually (£100,000 for shares issued before 6 April 2023).

Also, SEIS shares are exempt from CGT when sold if certain conditions are met, and up to 50% of the amount invested (up to a  £50,000 cap) can be set against other capital gains arising in the year of investment (effectively reducing the gain subject to tax).

Many of the conditions for SEIS relief are similar to those which apply for EIS. There are differences, however, including:

• The trade must be less than two years old to qualify for SEIS; and
• The company must not have previously issued EIS shares.

Venture capital trusts relief

A Venture Capital Trust (VCT) is a quoted investment fund which invests in small and medium-sized companies – very broadly, the sort of companies which qualify for EIS status. You can get income tax relief for investments in the fund at 30% on up to £200,000 investment a year. This relief is withdrawn where you don’t hold the VCT shares for at least five years. Dividends paid out by the VCT on investments within the £200,000 annual limit are received free of income tax, and the subsequent sale of VCT shares is free of CGT.

Note that this only applies on investments in the fund – if you buy pre-existing shares in the VCT on the market then these reliefs will not apply.

Conditions for the relief to apply include:

• The VCT itself must be listed on an EU regulated market,
• The VCT’s investments must be diversified with no more than 15% of its investments in a single company,
• At least 80% of its investments must be in ‘qualifying holdings’ – broadly, in UK resident companies (or companies with a UK permanent establishment) carrying on a qualifying trade. As with EIS and SEIS, certain trades are excluded.

Capital gains tax reliefs

Investors’ Relief

Investors’ Relief reduces the rate of CGT you pay on gains on the disposal of qualifying shares to 10% (instead of the standard 20%). Shares must be fully paid in cash and you must hold them for at least three years.

Relief is only available where the investee company is a trading company (or the holding company of a trading group). The general definition of ‘trading company’ applies here (where the trading company does not carry on substantial, broadly 20%, non-trading or investment type activities) and the additional exclusions which apply for EIS, SEIS and VCT reliefs are not in point.

For Investors’ Relief to be available, you must not be a director or an employee of the company. Limited exclusions apply where a business angel becomes an unpaid director following their investment, or where an individual becomes an employee more than 180 days after they make their investment (provided there was no reasonable prospect that this would happen at the point that the investment was made).

There are no annual limits on investments qualifying for Investors’ Relief, but a lifetime cap of £10 million of qualifying gains applies.

For more on this relief see our Investors’ Relief article.

Business Asset Disposal Relief (BADR) – previously called Entrepreneurs’ Relief

BADR is like Investors’ Relief: a reduced 10% rate of CGT on your qualifying gains, subject to a lifetime cap of £1 million (this is in addition to the £10 million cap for Investors’ Relief mentioned above). The key difference is in focus: unlike Investors’ Relief (and, indeed, the income tax reliefs outlined above), BADR is aimed at those with an active involvement in the business.

BADR is available on qualifying disposals of unincorporated businesses, as well as on shares. In the case of shares, relief is only available where, throughout the two years before the disposal, you’re:

• An officer or employee of the company; and
• Hold at least 5% of the ordinary share capital and voting rights of the company; and are either
  • Beneficially entitled to at least 5% of the company’s distributable profits and 5% of the company’s assets for distribution to equity holders on a winding up; or
  • Beneficially entitled to at least 5% of the proceeds on a sale of the entire ordinary share capital of the company (in determining whether this test is met at any time in the required two-year period, the whole of the ordinary share capital is deemed to be sold at its market value on the last day of that two-year period).

The company itself must be a trading company, or the holding company of a trading group. Note that the EIS, SEIS and VCT restrictions don’t apply here, and ‘trading’ takes its usual broader meaning (where the trading company doesn’t carry on substantial, broadly 20%, non-trading or investment type activities).

BADR is potentially worth up to £100,000 for an individual or £200,000 for a married couple or a couple in a civil partnership. There are several quirks in the legislation which can mean that relief is inadvertently lost: ensuring that full relief is available is, therefore, a key part of corporate structuring for entrepreneurs.

For more on this relief see our BADR article.

Conclusion

Various tax reliefs are available on investments in UK business, and the benefit of the reliefs can be considerable, particularly for higher risk investments, where the tax relief can mitigate a potential financial loss. You should therefore assess potentially available tax reliefs when considering a new investment. Equally important, though, is ensuring that all the conditions for relief are met both at the time of investment and throughout any qualifying period: an inadvertent breach can cause a costly withdrawal of relief – this is often something which arises when an entrepreneur sells their company.

How we can help

To find out more about any of these reliefs, please get in touch with your usual Saffery contact, or talk to Adam Kay.

This article is based on law and HMRC practice at 1 July 2024.