Amidst the backdrop of the new Labour government potentially increasing CGT rates, we have seen investors that are increasingly concerned about the future tax landscape.
Speculation about higher CGT rates has led many to consider triggering capital gains now, to take advantage of the current, lower rates. This preemptive approach aims to mitigate potential higher tax liabilities in the future. As investors look for strategies to manage these gains effectively, the Seed Enterprise Investment Scheme (SEIS) emerges as a valuable tool.
What is SEIS?
The Seed Enterprise Investment Scheme (SEIS) is a UK government initiative designed to encourage investment in early-stage companies. It offers a range of tax reliefs to individual investors who purchase shares in qualifying startups.
Key Benefits of SEIS
1. Income Tax Relief
Investors can claim 50% income tax relief on the amount invested in SEIS-qualifying companies, up to a maximum annual investment of £200,000. This can significantly reduce your overall tax liability.
2. Capital Gains Tax Relief
One of the most attractive features of SEIS is its ability to help mitigate capital gains tax. If you reinvest a capital gain into SEIS-qualifying shares, you can benefit from CGT relief on up to 50% of the reinvested amount. This effectively reduces the tax payable on the original gain, rather than deferring it.
3. Tax-Free Growth
Gains on SEIS shares are exempt from CGT if the shares are held for at least three years and the investor has claimed income tax relief on them. This can result in substantial tax savings if the investment performs well.
4. Loss Relief
Should your SEIS investment not succeed, you can claim loss relief. This allows you to offset the loss against your income, reducing your tax bill. The loss can be offset at your marginal rate of income tax (up to 45%).
How SEIS Can Help with Existing Capital Gains
Suppose you have a capital gain of £100,000 from the sale of a buy-to-let property, and you are facing a CGT bill. On top of this you have an income tax bill of £50,000 in the same tax year. By reinvesting the gain into SEIS shares, you can take advantage of several tax reliefs:
1. Income Tax Relief:
If you invest £100,000 in SEIS shares, you can claim up to £50,000 in income tax relief (50% of the investment).
2. CGT Relief:
Additionally, you can claim CGT relief on 50% of the reinvested gain. This means you can reduce the taxable gain by £50,000, lowering your CGT liability by £12,000
3. Tax-Free Growth and Loss Relief:
If the SEIS shares appreciate in value, the gains will be tax-free. Conversely, if the investment incurs a loss, you can claim loss relief against your income tax, further mitigating your exposure.
4. Inheritance Tax Relief:
SEIS shares may qualify for Business Relief, which provides up to 100% relief from Inheritance Tax (IHT) if the shares are held for at least two years at the time of death. This can reduce the taxable value of your estate for IHT purposes.
**Shares must be held for 2 years to qualify for Business Relief/IHT Exemption
Conclusion
In the right circumstances, using SEIS to mitigate capital gains tax can be a powerful strategy for investors looking to manage their tax liabilities. By understanding the benefits and ensuring that the investments qualify with SEIS requirements, you can take full advantage of the tax reliefs available. Always remember to speak with a tax or financial adviser to navigate the complexities of tax regulations and optimise your investment strategy.
Disclaimer – This article is not intended to offer tax advice. Neither myself or Fuel Ventures are qualified or authorised to give Tax advice. Tax laws and regulations are subject to change, and it is crucial to consult with a professional tax or financial adviser for specific guidance. The information presented here is based on the rules as of July 2024. Written by James D’Mello, Fuel Ventures.
