What’s the most tax and NI-efficient way to take income from your seed enterprise investment scheme while preserving the tax breaks?
Start-up tax incentive
The seed enterprise investment scheme (SEIS) can be used by start-ups or young companies, broadly those up to two years old. It gives those putting money in during the start-up period an income tax credit equal to 50% of your investment, plus there’s a capital gains tax break. Both incentives are subject to conditions.
Qualifying period
One of the conditions is that your money must remain in the company as ordinary share capital for at least three years from when the business commences. If in that period you receive a return on your investment, directly or indirectly, a corresponding part of the tax break is lost. You can receive dividends and, unlike the SEIS’s big brother the enterprise investment scheme, you can be a director of the company (but not an employee) during the three-year period.
Income in the early days
As long as the company makes profits it can pay dividends on SEIS shares in the normal way. Dividends are tax efficient for you, but the company can’t receive a corporation tax (CT) deduction. However, overall in most circumstances they’re the best way to extract profit.
Getting your money out
After three years you can, in theory, get your investment back without losing any of the tax breaks. But in practice this might be tricky. The company will still be relatively young and might require it to fund its operations. If it’s not able to buy you out for this reason you would have to find someone to buy the shares which probably won’t be easy. Therefore, if your capital remains locked in you need to find a way to make it work better and tax efficiently for you.
Reinvestment plan
The company can repay part of its share capital to its shareholders, which will allow you to reinvest it in a different tax-efficient form. These days this can be a relatively straightforward procedure, but all the shareholders must agree.
Tip. The share capital can be immediately reinvested as a loan so that the company has the capital it needs. It can pay you interest on this. The key advantages are:
- the company receives a CT deduction for interest it pays
- unlike dividends, it can pay interest even where it isn’t making profits, so you always get a return on your money.
A good return on your money?
While the rate of interest that the company can pay must be reasonably commercial, for unsecured loans this can be fairly high - 10% per annum or more wouldn’t be unreasonable bearing in mind that the company is still young and more risky than an established business.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.