Here’s a very surprising fact – we are turning into a nation of entrepreneurs.
I don’t know how it happened. Maybe it’s down to shows like Dragons Den and The Apprentice. Or maybe it’s just a load of redundant professionals having to do it for themselves.
But analysis of Companies House data shows that start-ups have jumped 51% over the last couple of years. More than 200,000 businesses have been set up in the last year alone.
Remarkable, you’re probably thinking. “Where the hell did they get the money?”
Well, having started a business or two of my own, I have some experience in this. And the truth is that there are some serious tax breaks for anyone investing in a start-up business in the UK.
Today I’d like to show you a few of them. Maybe a friend is asking you for a bit of cash for his business, r maybe you’re thinking of starting out for yourself. Either way, you need to know about this.
Better than the average tax break
Isas and pension funds are well covered in the press – you know what you can get there. But if you want serious tax breaks – things that’ll really reduce your tax bill, then this scheme will make you salivate.
If you’re one of the hundreds of thousands of people starting a new business, then you should know about the Enterprise Investment Scheme (EIS). A finely-honed tax avoidance scheme to get investors to part with their money, though many investors completely miss it.
Personally, I wouldn’t risk my capital in any start up if it didn’t take full advantage of EIS. In fact, I set up an EIS on a start-up about ten years ago. Frankly I was amazed at what Her Majesty’s Revenue offers investors and how easy it was to get it all approved.
And that’s why I want to show you this. Just in case you’re thinking about a new venture right now. It doesn’t even have to be a brand new business, just a fundraising will do.
Bearing in mind about 50% of new businesses fail in the first year (and 95% within five years), this could be the advantage you need.
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Get 20% back from the taxman
The aim of the scheme is to get money into new businesses.
The taxman will pay you back 20% of whatever you put in (you can claim it on your tax return) but you’ll have had to have paid tax in the first place. The maximum you can claim is £100k, though you can use last year’s earnings too (so you can double that).
When you come to selling your stock you won’t pay Capital Gains Tax (CGT). And with this being a high risk, high reward deal, that may come in handy.
Now if you’ve just made a load of money and have a CGT bill to pay, things get better still. You can put the bill on hold by investing the cash into an EIS. So if you’ve just cashed in on that buy-to-let, then rather than handing HMRC your profits, you can invest them instead.
And to top it all off, if in the end your investment goes sour, and let’s be honest, there’s a fair chance of that, you can count the loss against your income tax bill. Not just against your CGT bill (which is the norm). That’s another great offer from HMRC!
What you need to watch out for
Investing in start-ups is a high risk, high reward strategy. You’ve got an idea of the survival rates. I wouldn’t punt more than 5% of my pot into a venture this risky. But looking at the start-up figures, there’s clearly some risk appetite out there.
You have to hold the shares for three years before you can sell them (to keep the tax advantages). You can’t just claim your tax break and then simply sell the shares.
Remember, the idea here is it’s to attract new money from investors. You can’t just set up your own business and get all the tax relief. But if you’ve got a friend that’s looking for an investor, you can buy up to 30% of the business and still get the tax breaks.
This can be a great model if a group of you are looking to start a venture. But directors and employees won’t get the tax advantages (it’s for investors only). And immediate family of a director/employee can’t get the EIS breaks, in case you were thinking about getting round the rules that way.
Always remember that a tax break can never turn a bad investment into a good one. All you can do is make the investment more attractive – and get the taxman to stump up some capital alongside yourself.
So as always, be damn sure your investment is sound before you commit your cash. And the only way to do that is to dig deep and do as much research as you can. Easier said that done, of course. But this is an important point that I want to finish on today.
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• This article was first published on the 3rd November in the free investment email The Right side. Sign up to The Right Side here.
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