subject: How This Budget Boosts Business Angels [print this page] Small businesses seeking investment from "business angels" have been handed a huge boost by the Chancellor. Under the Seed Enterprise Investment Scheme (SEIS) announced last autumn and confirmed in the 2012 Budget, investors can now claim substantial tax relief on money put into businesses with less than 25 employees.
And with a substantial number of qualifying companies within the area, Grimsby based IFA Paul Duckworth believes that the north of Lincolnshire is set to reap real benefit from these new tax breaks. "There are a lot of very small businesses in this area and only a handful of very large ones, there is not much in the middle, not like areas such as Yorkshire and the West Midlands where there are lots of medium sized firms who employee several hundred people," he said.
Under the terms of the Chancellor's announcements, angels can claim 50% tax relief on a maximum investment of 100,000 - but the stipulation is that they must also have a tax bill of 50,000 to set it against. "If you're only paying 30,000 a year in tax, it makes sense to just put in enough to qualify for this amount in tax relief, 60,000 in this instance." explained Mr Duckworth. As far as the businesses are concerned, they must have started trading less than two years ago, have no more than 25 employees and have gross assets of less than 200,000. They have to be genuine trading companies that have an end product - investment would not qualify in service industries like finance or property development. Qualifying companies will be able to raise up to 150,000 under the scheme and funds invested must be used within three years.
"The tax relief is really tilted towards outside investors," Mr Duckworth explained. "Current employees are not allowed to invest and directors can't have more than a 30% shareholding." The aim is to get small companies up and running profitably. Added together, these companies offer a disproportionate amount of employment compared to the industrial giants and this could be a real boost to the local economy. "I am not sure why there is the restriction on directors as so many businesses are run by owner/managers although that is what has been decided."
Another big advantage for the investor is relief from Capital Gains Tax. "For instance, if the angel sold a business for 1 million, the CGT would probably be 10%, that is 100,000," Mr Duckworth said. "The big plus of SEIS is that if he invests that 100,000 in a small company, this will cancel out the CGT. "This saves the 10% CGT and with the 50% tax saving on his investment, it brings his tax relief up to 60%. He could be looking at 28% if he has sold an ordinary investment, which means the tax relief could be as much as 78% so, in effect, this means that the only exposure is 22 pence in every pound that is invested."
Furthermore, if the new business takes off, then after three years the angel can sell out his share without paying any CGT on any money he has made. "With some caveats, like the restricitions on directors investing, this has the potential to be brilliant for small businesses from this area," commented Paul Duckworth. "For people who have a lot of money and pay a substantial amount of income tax, it would be sensible to see about investing under the SEIS."
The Seed Enterprise Investment Scheme (SEIS) is designed to help small, early-stage companies to raise equity finance by offering a range of tax reliefs to individual investors who purchase new shares in those companies. It complements the existing Enterprise Investment Scheme (EIS) which will continue to offer tax reliefs to investors in higher-risk small companies. SEIS, by offering tax relief at a higher rate that that offered by the existing EIS, is intende dto recognise the particular difficulties which very early stage companies face in attracting investment.
SEIS applies for shares issued on or after 6 April 2012. The rules have been designed to mirror those of EIS as it is anticipated that companies may want to go on to use EIS after an initial investment under SEIS.