Showing posts with label seis. Show all posts
Showing posts with label seis. Show all posts

Friday, June 26, 2020

Investing directly vs. through a holding company

It's quite common in continental Europe for private equity investors or entrepreneurs to invest in projects through a holding company, either onshore of offshore. 

Not quite so in the UK, mostly because a number of tax benefits are not available in such a situation. And yet it might be a good idea nonetheless.  Let's look at the pros and cons of each approach.

Benefits of investing directly

If you are investing in a company that has the EIS or SEIS status, you need to do the investment directly in order to benefit from the generous tax breaks. 

If you sell investments you will be taxed only once vs having the holding company pay tax on the gain first and pay tax again when you extract the profits from the holding company. 

And also, investing directly is cheaper because you don't need to maintain another structure. 

Benefits of investing through a holding company

If your investment distributes surplus profits regularly to the holding company, no dividend tax is due since dividends are only taxed when they are distributed to the final shareholders. That allows you to ring-fence those profits as if the underlying investment were to go bankrupt, those profits are now protected one level up. 

Another benefit is that when you have multiple investors, they will probably have different time preference when it comes to profit extraction. Having a holding company allows you to be neutral to the timing of those distributions since the tax point is now decided by the extraction at the holding level.

One of the benefit of direct investing is the avoidance of double taxation. However there are situations where those can be avoided. Such a case is the Substantial Shareholding Exemption where the holding company owns more than 10% of an investment for the last 2 years. 

And finally, if you keep the profits in the holding company to be reinvested, you can delay the dividends tax forever. 

Monday, March 27, 2017

Non doms: BIR rules relaxed

Business Investment Relief (BIR) is a very attractive relief for non domiciled persons who have untaxed earnings or mixed funds abroad and who wanted to invest in the UK.

It is used a lot in conjunction with EIS or SEIS investments allowing people to bring in untaxed earnings without being taxed under the remittance basis and at the same time benefit from the tax relief provided by such schemes. New legislation included in Finance Bill 2017 now makes the BIR scheme even more flexible for any investment made on or after 6 April 2017. Here are the changes:
  1. The definition of a qualifying investment will be extended to the acquisition of existing shares and not just newly issued shares in a target company.
  2. Where the target company is preparing to trade or hold trading investments, the period during which it must actually do so will be extended from 2 to 5 years.

Thursday, February 9, 2017

Pension contributions: time is running out...

It's now the time of the year to start thinking about funding savings and pensions. And all the more this year as starting next year, high earners will see their tax benefits on pensions seriously curtailed.

There are no changes this year in VCTs, EIS and SEIS funds so there is no need to talk about those. Please refer to our previous articles on the subject. So what changes to expect this year?

1. As every year, make sure to fully fund your ISA

Each of us is entitled to pay up to £15,240 prior to 5th April 2016 into our ISA. And for the 17/18 tax year the limit will increase to £20,000. Before July 1, 2014, you could only invest half your annual ISA allowance into cash. However, following changes to ISA rules, you can invest the full £15,240 allowance into a cash ISA. This is an interest-bearing account that carries no risk, although as interest rates are so low, your returns may be eroded by inflation. Also note that you can invest some of your allowance in Innovative Finance ISA, such as P2P funds.

Don't forget that your kids have an allowance as well. The Junior ISA allowance for 16/17 is £4,080.

Thursday, December 1, 2016

Saving tax with Deferral of Capital Gains

While Capital Gain Taxes have been slashed in the recent budget to 10% and 20% (from the 18% and 28% that it used to be), CGT has remained unchanged for residential property gains. While the tax rate for gains is lower than the one for income, amounts tend to be much bigger and far appart, making it harder to use allowances and low rate bands.

This is where deferral comes in handy. The Enterprise Investment Scheme (EIS) provides one of the mechanisms that allows such a deferral. Most people misunderstand that the general EIS conditions for income tax relief are much more restrictive than the conditions for CGT deferral. In particular the requirement that one owns less than 30% of the company or that one is connected to the business only applies to the income tax relief component of the EIS, not the CGT deferral. Same thing for the requirement that the investment be held 3 years or more: if you sell earlier the deferral just ends then (see HMRC note).

Wednesday, October 21, 2015

Five tips to mitigate Inheritance Tax in the UK

Inheritance Tax (IHT) in the UK can be extremely punitive. For spouses or civil partners there is no tax to pay but for anyone else, the IHT rate is 40% for sums above the nil rate band (NRB) of £325,000 per individual.

It does not have to be. There are a number of ways one can significantly reduce this tax with a little bit of estate planning. Here are 5 tips you need to keep in mind when it comes to IHT:

1. Gifts from disposable income

This is actually an HMRC concession that most people are unaware of. It relates to the ability to give away an unlimited amount provided it qualifies as "normal expenditure out of income" and it is arguably one of the most useful IHT exemptions. It is also very flexible, because you don't have to gift the same amount every year or make the gifts to the same person. Many people use the exemption to pass on money on a regular basis to children or grandchildren. It is important to remember however that the exemption is not given automatically and has to be claimed retrospectively by the executors of your estate. For the gifts to qualify, you must be able to show that the payments are made out of surplus income - either earned income or investment income - and that they do not reduce your standard of living and in particular you cannot pass on income and then use your capital to supplement living costs.

2. Gifts of capital survived 7 years

There is a way to give your whole estate away and pay no tax at all. As long as you survive the gift by 7 years or more. This type of transfer is known as a "Potentially Exempt Transfer" or a PET. It is important to bear in mind that when making a large gift it has to be in excess of the nil band rate (NBR) to benefit from any potential reduction in the potential tax due as a result of the taper relief. In addition it is also important to be aware that any gift made essentially uses up the nil rate band and could push the remaining estate into a full rate of tax with no relief at all for the subsequent 7 years.

Keep in mind that if you give your estate away, you don't control it anymore. Something that many people are reluctant to do. But there is another option. Please read on....

Thursday, April 19, 2012

EIS and SEIS: a comparison

A number of changes were introduced in the new budget. In particular with respect to private equity investment tax reliefs. Now is the time to invest in startups, with two options both very generous when it comes to providing tax relief both for income tax but also for capital gains tax (and especially for high rate tax payers who are the natural target for those schemes).

Enterprise Investment Scheme (EIS)

Here is a summary of the changes some subject to EU State aid approval being granted:
  • The maximum annual amount that an individual can invest under the EIS will be doubled to £1m for 2012/13 onwards. There will no longer be any minimum investment; it was previously £500 in any one company.

Wednesday, March 21, 2012

Budget Summary 2012

Amidst fears of a double-dip recession, Chancellor of the Exchequer George Osborne had the unenviable task of presenting the Budget for the third time on 21st March. It came as no surprise when the Chancellor announced very early on in his speech that there would be no "unfunded giveaways", confirming speculation that any concessions would need to be offset by an increase in tax elsewhere.

Although there was a significant change to the Stamp Duty on residential property costing over £2,000,000, the wealthy will benefit from a cut in the top rate of tax down to 45% from April 2013 (currently 50%). Individuals will gain from an £1,100 increase in the personal allowance from April 2013 but they could also lose out if they are earning over £50,000 and in receipt of Child Benefit. Large companies will welcome the 2% cut in their rate of corporation tax. But whether small or large, all businesses were disappointed the government did not reverse their plans to reduce the Annual Investment Allowance to just £25,000.

Thursday, December 15, 2011

The Seed Enterprise Investment Scheme

This new tax advantaged form of venture capital scheme was announced at the Autumn Statement 2011; it will be focused on smaller, start up companies and will provide a form of relief similar to the EIS Scheme. This scheme will make tax relief available to investors who subscribe for shares and have less than a 30% stake in the company.

The main points to note are as follows:
  • The type of company this applies to is one that has less than 25 employees with assets of up to £200,000 who are preparing to carry on new business