Risk with tax breaks as a reward
The Government encourages individuals to make high-risk investments in small trading companies or charities by providing income tax relief for investors in the following schemes (limits for 2021/22):
• Social Investment Tax Relief (SITR): 30% relief on up to £1 million
• Enterprise Investment Scheme (EIS): 30% relief on up to £2 million
• Seed Enterprise Investment Scheme (SEIS): 50% relief on up to £100,000
• Venture Capital Trust (VCT): 30% relief on up to £200,000
The amounts invested under EIS, SEIS or SITR can be treated as made in the previous tax year if the investment limit for the earlier year has not been reached.
When you dispose of shares acquired under these schemes, any capital gains you realise will be free of CGT if you’ve held the investment for at least three years (except VCTs, where there is no minimum period).
Tax due on capital gains made from selling other assets can be deferred by reinvesting under the EIS or SITR within three years of making the gain. However, the SITR scheme will only be open for investments until 5 April 2023.
Reinvesting the gain in SEIS shares will halve the tax on that gain if the investment limits and conditions are not breached.
If you acquire unquoted trading company shares on or after 17 March 2016 in a company for which you do not work and hold them for at least three years, any gains made on the disposal can qualify for Investors’ Relief, meaning the rate of CGT due is only 10% on gains up to £10m.
These tax reliefs won’t turn a bad investment into a good one, but they will make a good one better and will reduce the risk involved in investing. You should, however, always take advice from a qualified financial adviser on where to put your money.
If you are thinking of investing in one of these schemes, you may want to do so before 6 April 2022 to maximise the benefit.
