If you’re looking to raise capital from investors to give your start up a cash injection, it’s key to understand how your investors can benefit (apart from owning a slice of your exciting business).
There are a couple of schemes that give investors significant tax breaks, which will reduce their risk and will make raising funds that little bit easier.
Seed Enterprise Investment Scheme (SEIS)
This is mainly focused on early staged start-ups and under this scheme, you can raise up to £150,000. SEIS allows an individual to invest personally up to £100,000 and in return, they will receive an initial tax break of 50%.
Should your company fly, and you manage to sell your business after 3 years, your investor will have zero tax to pay on any gain made on their original investment.
Investing in early stage start-ups is risky, and should your start up fail, there is further relief available for your investor. Meaning an investment of £20,000 and assuming they are in the highest tax band of 45%, their net loss would amount to £5,500 reducing their exposure by 72.5% of their original investment.
Enterprise Investment Scheme (EIS)
This scheme is more focused towards medium sized start-ups, or companies looking to raise over £150,000, as you can raise up to £12million under this scheme. EIS allows an individual to invest up to £1million and this time they will receive an initial tax break of 30%.
As with the SEIS scheme, there will to no capital gains tax due should you successfully exit your business after 3 years.
As before, should your business fail, there is further relief available. So the £20,000 investment used in the example above and assuming they are in the highest tax band of 45%, their net loss would amount to £7,700 reducing their exposure by 61.5% on their original investment.
This scheme isn’t as generous as SEIS, however still provides very attractive tax breaks for investors looking to invest in more established start ups or for investments over £100,000.
Raising Capital for Start Ups
For both schemes, there are a few requirements you must meet, such as you must not trade within an excluded trade, investors must not be a director of the business at the time of investment and an individual can not hold more than 30% of the company’s overall shares.
Both EIS and SEIS are available when raising capital through Crowdcube or Seedrs.
Before you start raising capital, you need to make the proposal as attractive to investors as possible. This is not just producing a smart looking deck or an expensive promo video, by reducing their exposure by up to 72.5% will show them you care about their money and you want the investment to work for them as well as you.
Click here if you would like to speak to one of the team.
