Venture capital schemes: tax relief for investors
Information on the tax relief available when you invest, as an individual, in companies that qualify for venture capital schemes.
HM Revenue and Customs (HMRC) offers tax relief to encourage individuals to invest in companies through a number of venture capital schemes.
You can get tax relief when you invest in small UK companies and social enterprises that qualify for venture capital schemes.
The amount and type of tax relief you can claim depends on what venture capital scheme you use to invest in a company and you meet certain conditions.
You can get tax relief through the following venture capital schemes:
|Scheme||annual investment limit you can
claim relief on
|Income Tax relief||minimum qualifying period
for share relief
|tax payable on dividends|
|Enterprise Investment Scheme (EIS)||£1 million||30%||3 years||Yes|
|Seed Enterprise Investment Scheme (SEIS)||£100,000||50%||3 years||Yes|
|Social Investment Tax Relief (SITR)||£1 million||30%||3 years||Yes|
|Venture Capital Trusts (VCT)||£200,000||30%||5 years||No|
You can invest in a number of companies during a year and those investments might qualify for the schemes, but you can’t claim relief for the same investment. You’ll get relief by investing in newly issued shares.
As well as shares, there’s also the option to invest through a debt instrument for SITR.
You can claim Income Tax relief based on the amount that you invest in a qualifying company. You can also get Capital Gains Tax relief on any profits you make on your investment.
Choosing when to claim Income Tax relief
The amount of Income Tax relief you can get is based on the amount that you invest which can be:
- claimed in the year you make the investment
- carried back to the year before you made the investment
You can’t carry forward unused Income Tax relief to future years.
Tax relief on the sale of assets
Defer Capital Gains Tax
You won’t have to pay Capital Gains Tax immediately if you use the money from the sale of an asset to make an investment in a company that qualifies for EIS and SITR.
When you claim deferral relief you’ll need to pay the tax if:
- you dispose of the investment
- the investment is cancelled, redeemed or repaid
- the company stops meeting the scheme conditions
- you become non-resident
Reinvestment relief for SEIS
Reinvestment relief gives you capital gains tax relief when you sell an asset to use all or part of the gain to reinvest in shares for a company that qualifies for SEIS.
If you invested the gain from an asset sold between 6 April 2012 and 5 April 2013 you can get capital gains tax relief on the whole investment.
If you invest the gain from an asset sold after 6 April 2013 you can get capital gains tax relief on 50% of the investment.
The annual maximum amount of capital gains re-investment relief allowed is £100,000.
You must sell the asset in the same year that you claim income tax relief on the investment, but you don’t have to sell the asset before you invest. This means if you claim income tax relief in the previous year using ‘carry back’ you must have sold the asset in that year.
Selling your investment
Capital Gains Tax exemption
You won’t have to pay any Capital Gains Tax when you sell your shares if:
- you’ve claimed Income Tax relief
- you’ve held the shares for the minimum amount of time
- the investment hasn’t been withdrawn
If you sell your EIS, SEIS or SITR shares at a loss you can set the loss amount, less any Income Tax relief already given, against your income or capital gains.
You can apply loss relief to the year that you sold the shares or the year before.
If you sell your VCT shares at a loss, you can’t claim loss relief but you won’t pay any Capital Gains Tax if you sell them at a profit.
Your relationship with the company or social enterprise
The company will need to meet the conditions for one of the schemes. You can ask them for an advance assurance letter that shows the share issue is likely to qualify for venture capital scheme relief.
When you can’t invest
You and your associates can’t:
- hold a total of more than 30% of the company’s
- voting rights
- loan capital for SITR
- be employed by the company
Your associates are:
- parents, grandparents and great-grandparents
- children, grandchildren and great-grandchildren
- spouses and civil partners
- business partners
- trustees of settlements where you are the settlor or beneficiary
If you’re a director of a company, but not in paid employment, you may still be able to claim tax relief on the investments that you make through:
- EIS and SITR if you receive certain payments, for example, payments or reimbursement of expenses as part of your duties
If you’re a paid director, you may still be able to get EIS tax relief if either:
- you were issued with SEIS shares whilst a paid director of the company in its SEIS stage, and the new share issue is within 3 years of the SEIS share issue
- the EIS or subscriber shares were issued to you before you became a paid director and the new share issue is within 3 years of either the:
- earlier EIS share issue
- date the company began trading or carrying on the research and development which will lead to its trade
Types of investment
Your shares must be paid up in full, in cash, when they’re issued to claim tax relief. You can’t use a loan to buy the shares if the loan itself is linked to the company. You’ll only get EIS relief if the company is registered at Companies House and you’ve bought the shares through the registered company.
You must purchase full risk ordinary shares which aren’t redeemable and carry no special rights to a company’s assets if it closes. When a company closes the shares must not include preferential rights to dividends.
For SEIS and EIS you can have limited preferential rights. However the dividend can’t be varied by the company, shareholder or other person or have a cumulative right to receive the dividend.
For SITR the shares must not have the right to a dividend of a fixed amount or more than a reasonable commercial rate.
When you buy the shares there can’t be an arrangement:
- to protect your investment
- to sell the shares at end of, or during the relevant period
- to structure the company’s activities to let you benefit from a venture capital scheme
- for a reciprocal agreement where the company’s owner invests back in your company to also gain tax relief
You won’t be able to claim Income Tax relief if you received new shares since 18 November 2015 and you already held other shares in the company that weren’t subscriber shares issued to you, or shares where you’ve received an EIS3. You can find more information about claiming income tax relief under the Enterprise Investment Scheme.
Lending to social enterprises
In addition to being able to invest in shares, you can also loan money to a social enterprise.
The loan or debt must not be secured on any assets and, if interest is charged, this must be at a reasonable commercial rate. There must be an arrangement for any part of the loan to be repaid within 3 years of the investment.
Debt investment date
If you make a single payment the investment begins when the company issues a debt instrument, like a debenture, to you. If the company doesn’t issue a debt instrument the investment begins when the investment agreement takes effect.
If the investment involves several payments then each investment begins when you pay each amount to the social enterprise.
When you can sell your investment
You need to keep your whole investment in a company that qualifies for EIS, SEIS and SITR for 3 years to claim the full tax reliefs available. You will lose tax relief if during this time:
- the company stops qualifying for an investment scheme
- you develop a connection with the company
You’ll lose the tax relief and you should tell HMRC.
You must keep your whole investment in a VCT for 5 years, and if it stops qualifying in this time you’ll lose relief. But you won’t lose relief if you gain a connection with the company.
How to claim relief
You can claim relief up to 5 years after the 31 January following the tax year in which you made the investment.
SEIS and EIS
You’ll need to get a certificate from the company before you can claim tax relief.
If you want to claim in the current year you can request:
- a change to your PAYE tax code
- an adjustment to any Self Assessment on account due
If you want to claim for the previous year, make your claim on your Self Assessment tax return.
If the shares were issued in a different year, or you are claiming for Capital Gains deferral relief, you need to complete the claim part of the certificate.
You need to claim both Income Tax and Capital Gains Tax relief on your Self Assessment tax return.
You should claim both Income Tax relief in your Self Assessment tax return for the year in which the shares were issued.
You don’t have to wait until you send in your tax return to get the benefit of the relief. You can do this by asking HMRC to make an adjustment to your tax code or requesting a tax refund.
Published: 1 January 2016
From: HM Revenue & Customs