HMRC encourage wealthy taxpayers to invest in small unquoted trading companies by offering generous tax benefits to business angels who are willing to risk their hard cash in exchange for shares.

The small enterprise investment scheme is geared to small companies with assets of less than £200,000 and less than 25 employees. The company should be trading for no more than 2 years and cannot raise more than £150,000 under the SEIS scheme.

The venture capitalist can buy new shares worth up to £100,000 each tax year and be an unconnected investor where the investor and his/her direct family members cannot own more than 30% ordinary share capital. This ensures that control still rests with the founder of the business.

The company must use the at least 70% of the funds before the lucrative tax benefits are claimed.

The business angel gets an immediate income tax reducer of £100,000 x 50% =£50,000.  Any unused income tax reducer can be carried back to the previous tax year to generate a tax refund.

In addition, the venture capitalist is also entitled to get £50,000 of another gain tax free. What this means is the business angel can save up to £50,000 x 28% = £14,000 in capital gains tax.

This means that the net investment is £100,000 -£50,000 income tax savings -£14,000 capital gains tax savings = £36,000.

The SEIS shares must be retained for at least 3 years and any gain arising is completely tax free.

This means that if the venture capitalist invests £100,000 in the shares and then sells the shares after 3 years for £500,000, the gain of £400,000 will be tax free. This will save a potential tax  liability of £400,000 x 20% =£80,000.

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