How to boost businesses tax efficiently

Investing in smaller, start-up businesses can be more risky, which is why the government offers tax incentives through specialist schemes. 

When you’re selling a business or shares in a qualifying company, it’s fairly well known that it’s possible to claim entrepreneurs’ relief, which will help limit your capital gains tax liability to just 10%. What’s more, if assets are being sold because you need to replace them, you may be able to avoid CGT liability with an application for ‘rollover’ relief.

As the economy picks up, it may be that you’re looking to dispose of investments or non-business assets which are increasing in value. The problem is that, if you’re a higher earner, your gains will be taxed at 28%. Unsurprisingly, many clients ask whether there might be a way of lessening the blow. 

One tax-planning option is simply to use your spouse or civil partner’s annual exemptions, as well as your own. It’s usually a sensible approach, but the savings are never going to be huge. The joint maximum figure will be £22,000, so the most you can save is approx. £6,000. Also, if your spouse or civil partner does not already use the whole of their basic rate tax band then it might be possible to reduce tax on part of the gain to 18%.

Another possibility is that you take advice from an IFA and consider options such as the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), which are designed to encourage support for small, unquoted companies.

The government recognises that if you invest in up-and-coming businesses, there’s a greater degree of risk attached, which is one reason why they offer relief on both income and capital gains tax, provided certain conditions are met.

With EIS, where the maximum investment is £1m, you can obtain 30% income tax relief on the total amount invested in the tax year (which can also be carried back to the previous year, if preferred). Remember, you can’t have been an employee or director of the business and your interest in the company must be less than 30%. The relief is deducted from your income tax liability, which can be reduced to zero, but no further.

On the capital gains tax front, you can defer payment by reinvesting in EIS shares up to one year before – or three years after – your liability arises. In fact, the tax can be deferred until the point you dispose of the EIS shares and can be deferred again if you make a new EIS investment. If the gain is still deferred at the time of your death, then it won’t come back into charge. What’s more, EIS shares are themselves exempt from CGT on their disposal, provided income tax relief was obtained on the investment and you have held them for a minimum of three years.

SEIS was introduced in 2012 and is designed to support companies that are perceived as slightly riskier investments. If shares are acquired within two years of the business starting to trade, 50% income tax relief is available on the total amount invested in the tax year (or, again, a previous tax year if that’s more desirable). In this case, the maximum investment is £100,000, providing relief of up to £50,000, which is deducted from your income tax liability. As with EIS, it can only be used to reduce your tax liability to zero.

SEIS shares can be exempt from capital gains tax, but the gain and the SEIS investment must be made in the same year, subject to limited carry-back rules. A difference with EIS is that up to 50% of the gains reinvested in the SEIS are exempt from CGT rather than simply being deferred.

The investments mentioned above can in some circumstances have Inheritance Tax advantages but that should be considered as part of a larger IHT planning exercise.