Venture capital schemes were introduced in the UK to provide incentives for investors to finance businesses in the early stages, in order to allow them to grow. There are four main venture capital schemes which are supported by the UK Government; Seed Enterprise Investment Scheme (SEIS), Enterprise Investment Scheme (EIS), Venture Capital Trust (VCT) and, finally, Social Investment Tax Relief (SITR).
Continue reading as we briefly outline how each scheme works and the benefits of applying under them.
Enterprise Investment Scheme
Being the first of the venture capital schemes introduced, EIS has been well-received since its inception in 1994, as it offers attractive benefits for both parties. The start-up or SME is able to secure the funding they require to kick-start their company, whilst the investor receives generous tax breaks, as an incentive to invest in an early-stage enterprise.
Tax relief benefits under EIS include; a 30% income tax relief, capital gains exemption, loss relief and inheritance tax relief, which helps offset the higher risks faced when investing in a business at such a premature stage.
Seed Enterprise Investment Scheme
A newer venture capital scheme, the SEIS only applies to small businesses which are in the very early stages and have thus been trading for less than two years.
In order to qualify for a SEIS investment, the company must have less than 25 employees on payroll and less than £200,000 gross assets. The scheme allows qualifying businesses to raise up to £150,000, as long as the investment is spent in the first three years after the share is issued.
Though riskier, the scheme offers greater tax benefits than under EIS, including 50% income tax relief and reinvestment relief, which allows for the claim back of half the gains reinvested.
Venture Capital Trusts
Venture Capital Trusts are listed companies handled by a fund manager, which then invest in smaller companies that aren’t listed on the stock market. Again, they are beneficial because they offer great tax breaks in order to attract investors who are open to investing in higher-risk enterprises.
Under VCT, investors are only able to invest in a company which has less than 250 employees and less than £15m in gross assets.
Social Investment Tax Relief
The SITR scheme was introduced to encourage investment into social enterprises, allowing them to gain funding, which otherwise might not have been accessible. As with the other venture capital schemes, investors benefit from generous tax reliefs.
The scheme is only open to specific types of organisations, including registered charities, community interest companies (CICs) and community benefit societies, all of which must carry out a qualifying trade. Organisations must have less than 500 members of staff and less than £15m in gross assets in order to be eligible for the investment.
Moreover, only £250,000 over three years can be raised by SITR scheme. Any shares in the enterprise must be new, paid in full and not offered preferentially.
Is a venture capital scheme right for you?
As with all investments, there are risks involved. However, the nature of these types of investment means that the chances of failure or loss are greater than with established companies or those already on the stock market.
That being said, the generous tax benefits may be enough to encourage the proficient investors amongst us to take the leap and expand their portfolio into new areas. You never know, you could be investing in the next big thing!
A word of advice, though – always carry out a significant amount of research, seek professional advice where necessary, and only invest that which you can afford to lose.