I saw that title on a blog post (click here) by Mike Hyland of Grant Thornton about the Seed Enterprise Investment Scheme and I liked it so I hope he won’t mind me borrowing it.
A good point Mke makes is that given the way the loss reliefs work and the interaction with the 50% income tax relief and the additional CGT exemption worth 28% in the first year of Seed Enterprise Investment Scheme is that an investment in SEIS can actually give you 103% tax relief if your entire investment fails.
- £100,000 invested in Seed Enterprise Investment Scheme after 6 April 2012 gets 50% income tax relief (incidentally the investment may be treated as having been made in the year ended 5 April 2012 and hence the relief obtained earlier)
- If the taxpayer also has a capital gain which is realised in 2012/13 which is claimed as having been reinvested in SEIS then the 28% capital gain will be wholly exempted
- In the event the investment fails the net investment after income tax relief i.e. £50,000 is also available to offset against taxable income, so for a 50% tax payer that’s worth another £25,000 (or 25% of the original investment)
Add it all up and you get to 103%. That’s some underpinning in the downside case and to my mind makes Seed Enterprise Investment Scheme a no brainer in 2012/13. Of course this is based on the draft Finance Bill and it remains to be whether it makes it into the final legislation. As long as it doesn’t give rise to abuse (and with 60 pages of legislation, most of which is anti-avoidance, hopefully HMRC already have it covered) that is a great one year offer by the Government to stimulate investment in new enterprises and provide a much needed boost to the economy.
The Government is effectively saying to investors: For the first year of SEIS, rather than pay income tax and capital gains tax, use your money to invest in SEIS and put the money to work stimulating new employment and creating something of value. If the investment succeeds and you realise your investment after three years you keep all the gains and don’t pay any tax on it. On the other hand, since new ventures are risky, if the investment fails, you can get a further income tax relief that effectively means you didn’t lose anything at all.
In any event waiting to do SEIS in the new tax year makes much more sense than rushing to invest in and EIS or VCT before the tax year end since you can carry back the income tax relief on SEIS to 2011/12. It certainly doesn’t make sense for most people in the 50% tax bracket to do a regular EIS this year and certainly not an Approved Fund since you are limited to income tax relief at 30% in 2011/12 or, if you make the carry back claim, only 20% in 2010/11.
More on this point later.