It’s A Seedy Business
In a highly regulated world, most law-abiding citizens who’ve made enough to become investors in start-ups don’t get to feel the buzz of evading tax and authority like the average money launderer, without risking a stretch at her Majesty’s leisure.
And then one day, presumably feeling sorry for their honest vassals who filled the coffers, Her Majesty’s Revenue & Customs (HMRC) gave birth to the Enterprise Investment Scheme (EIS), and, not long after, her smaller but slightly more attractive sister, the Seed Enterprise Investment Scheme (SEIS), and life for start-ups and investors changed forever.
Now, qualifying taxpayers could invest in qualifying start-ups, and offset the sum invested against income tax bills, and feel the buzz of evading tax like your average money launderer, with the full approval and encouragement of authority, and run only the risk that they’d lose their money, rather than their freedom, if the start-up went bust.
Let’s take a higher rate taxpayer, and a start-up that has received advance HMRC assurance it qualifies to receive SEIS investment. Each taxpayer is allowed to invest up to £100k in the start-up in any one year, which is in turn allowed to issue SEIS shares worth up to £150k total. Let’s say the investor buys £10k of shares in the start-up. Up to 50% of that (dependent on tax rate) can be offset against current or the previous year’s tax bill, which is a saving of up to £5k. If it were to be claimed against the previous year’s tax, HMRC send you a check in the post. Let’s not overlook the mental health benefits of this simple act of mercy on overburdened taxpayers.
And when SEIS runs out, what next?
Well, that’s when the EIS big sister gets involved. Each taxpayer is allowed to invest up to £1m EIS in what is now a company if it has survived, and the company is allowed to take up to £12m EIS investment over the course of its lifetime (£5m per year). But for EIS, only up to 30% of investment can be offset against income tax.
What’s the catch?
The investor has to hold the shares in the company for three years, and the company cannot begin with assets of over £200k, and must be a genuine start-up risk. So no ducking out early doors for investors, or asset prior purchases by start-ups which remove investment risk. Some of the rules of the game are clearer than others, but where HMRC is concerned, better to err on the side of caution where any doubt exists.
Any further incentives?
There are, actually. First, if an investor realises chargeable capital gains when selling an asset, payments to HMRC due on those gains can be deferred in proportion to the amount invested in a qualifying start-up or company. Secondly, once the SEIS / EIS shares have been held for 3 years, they can be sold capital gains tax free. And last but not least, once they have been held for 2 years, they can be passed on with 100% inheritance tax relief, making SEIS / EIS shares an important, if little know, potential part of estate planning. This is what makes the money launderers jealous. Investor’s who pick a winner can sell these shares without paying another penny in tax, and that, in a climate where everyone knows capital gains tax can only go up, might mean substantial savings at some future date.
And if the start-up or company goes bust?
Investors can claim loss relief, which when added to investment relief already claimed, means effectively that in the worse-case scenario, for EIS a 45% rate taxpayer shouldn’t be exposed to more than 38.5p loss in every £, for SEIS that’s down to 27.5p, because the rest would have ended up in HMRC’s coffers anyway if the taxpayer preferred to pay the taxman direct. In that instance, none of the SEIS / EIS capital gains and inheritance tax advantages count, of course. No risk, no reward, a dictum that every investor and entrepreneur uninfected by subsidies understands and loves, or they’d prefer boring old government bonds, or gold.
Drilling Down On Detail
Tax Breaking Conclusion
When all is said and done, this is a brilliant scheme, and one that benefits investors, entrepreneurs, and the taxman, which is why one can confidently predict it will survive changing governments, and most other things, up to Armageddon. But, just like the Reformer, the awesome Pilates bed of springs invented by Jospeh Pilates nearly 100 years ago with the potential to transform lives, it takes time for word to get out, especially beyond seasoned circles.
Crowd Equity Funding
But the investment landscape is changing, like the health landscape, and just like there are state-of-the-art studios like Ebru Evrim bringing clients and Pilates Reformers together to change physical health, there are investment platforms like Seedrs bringing an ever widening circle of investors and startups together, in ways that can change financial health, if approached with the right attitude.
Who Are Seedrs?
You can think of them as the London Stock Exchange of the UK / EU start-up universe, an FCA regulated blue chip crowd equity funding platform, doing the same job for start-ups that the famous exchanges do for public listed companies. They recently teamed up with Republic, a US crowd equity funding platform, offering the same service to start-ups looking to grow in the American market, which is regulated by the FSA. Seedrs were one of the first crowd equity funding platforms, founded in 2012.
Where do I start?
As always, when it comes to something new, the best way to learn about it is to have a go. Start-ups like Ebru Evrim Ltd go through a comprehensive vetting process when they put themselves forward to raise equity investment through Seedrs, including fact checking for every statement made on the Seedrs campaign platform. They are the experts at helping what are often frenetic startups working long hours to gain traction in their sector take that next step, with professional shareholder agreements that dovetail into standard articles of association, and a subscription agreement that secures Seedrs nominee shareholders, and by implication, any other shareholders.
And when finance is tight, as it is for most in the early start-up phase, the level of expertise they bring to the table is fantastic value for money, with almost all payment taken after the raise, and then only if the campaign is a success and the minimum target is reached. That leaves start-up founder entrepreneur(s) and team with the extra time and resource to build the brand out into the marketplace, to the point where the business is big enough and revenue is strong enough to pay for specialists and experts who can share some of the strain of a growing business for some of the gain.
What does all this mean for investors?
It means that any qualified SEIS / EIS startup, or early stage company, that appears on the Seedrs platform, has passed HMRC advance assurance to sell SEIS / EIS shares, and has passed Seedrs due diligence, so will say what it does on the tin by the time the campaign goes live on the Seedrs platform, first to the start-up’s own community through Priority Access (below), and then through Public Access to the wider Seedrs investment community. To sign-up to the platform, investors need to prove they understand risk reward, by answering a few simple questions, and then before they invest, go through a verification process which, sadly for the money launderers, includes basic ID document and proof of address checks. So this is a legal buzz they’ll have to miss out on.
Buy EIS Shares in Ebru Evrim Ltd At Seedrs
For those who want to put a £10 toe into the SEIS / EIS water, or take a £100k deep dive, the Seedrs platform is a great place to start.
Yoga & Pilates Studios Under One Roof
Sounds so obvious, you wonder why no one thought of it before.
It’s The Company You Keep
Two doors down Russell & Bromley, four doors down Apple, to the high street born @ http://ebruevrim.com
Investing involves risks, including loss of capital, illiquidity, lack of dividends and dilution, and should be done only as part of a diversified portfolio. Please read the Risk Warnings before investing. Investments should only be made by investors who understand these risks. Tax treatment depends on individual circumstances and is subject to change in future. Seedrs does not make investment recommendations to you and any investment decision should be made on the basis of the full campaign. No communications from Seedrs, through email or any other medium, should be construed as an investment recommendation.
This blog post has been approved as a financial promotion by Seedrs Limited.
Seedrs Limited is authorised and regulated by the Financial Conduct Authority. Seedrs Limited is a limited company, registered in England and Wales (No. 06848016), with registered office at Churchill House, 142-146 Old Street, London EC1V 9BW.