How to save tax when investing in startups

Any sensible investor in startups knows that many of his or her investments will fail.

Billboards and money sections of newspapers up and down the UK will soon be filled with the annual springtime ISA onslaught from all those fund managers dusting off the tried-and-tested “use it or lose it” adverts to fund this year's Ferrari.

How to save tax when investing in startups

How to save tax when investing in startups

But before investors fall obediently into line yet again, they should pause and look closer at the full scope of the taxman’s generosity, as ISA tax breaks are a very long way from the best on offer now.

People investing in startups through crowdfunding platforms or the old offline way through angel investor networks, are often eligible for some startlingly large tax breaks. In fact, nowhere in the world will you find bigger tax incentives to invest in startup businesses.

As long as the startup you choose to invest in meets various eligibility criteria (as the vast majority do), then regardless of what income tax bracket you sit within, as an investor you will get back half of what you invest in that tax year from the taxman as a reduced income tax bill for that year.

This is clearly a generous tax break and is unusual as it is equally attractive to all tiers of income tax payers – not just higher rate payers. As long as you pay a sufficient amount in income tax, you will get half of the amount you invested back. ISA reliefs can’t touch this. And even pension tax breaks –with all their lockins and issues with annuities – don’t get near this level of largesse from the Treasury.

For many investors this tax incentive is sufficient to encourage them to look seriously at the pros and cons of investing in startup businesses, as it effectively doubles whatever sum you have available to invest.

But there is more. Quite a lot more in fact.

Next up is the equivalent of what an ISA offers (and all that an ISA offers) – no income or capital gains tax to pay on any investment profits you make. Given that everyone’s hope when investing in startups is at least one stellar performer in the portfolio, possibly even a Facebook or Twitter, this relief is very attractive. Even if you don’t normally worry about capital gains, it means a huge profit one day will stay all yours.

On top of this, and unlike an ISA, there is no inheritance tax liability to worry about for those you leave your investments to should you die. Given the longer term nature of investing in startups, this is also a very attractive additional relief.

The Seed Enterprise Investment Scheme also includes a tax relief hugely valuable to those investing in startups as many of these investments are likely to fail. It is called loss relief and it softens the blow of any startups in your portfolio that do go bust.

Any sensible investor in startups knows that many of his or her investments will fail. That is just the nature of this asset class. It is the collateral damage as you wait for the big successes to make the portfolio as a whole fruitful and potentially very profitable. Loss relief is an important concession in the light of this, and a key part of reducing the risks involved in this unique asset class.

If one or more of your startups fails then loss relief allows you to recover income tax (at whatever tax rate you pay) on the half of that investment not already repaid to you by the income tax relief you received when you first invested. It works by allowing you to offset your losses against either a tax liability in the year you make the loss.

Finally, SEIS includes a further relief relevant to those with a capital gains tax liability from other forms of investment. Depending on what year this liability falls in, it can be reduced by up to 100% if you reinvest the gains in an SEIS-eligible startup.

One of the reasons more investors have not leapt into action on the back of these extremely generous tax incentives is that many have thought they were just too good to be true – that there must be some catch lurking somewhere.

But there isn’t. The generosity is just a sign of how clear the government is about the importance of capital finding its way swiftly and effectively into these fledgling businesses because they are such a crucial part of achieving a robust and sustainable economic recovery.

Given the extent to which these reliefs dwarf those offered with an ISA, we can see clearly which investment choice the government believes is most urgent and important for our economic future.

Saving Tax & Equity Release

What Is Equity Release?

Equity release is the use of financial arrangements that provide the owner of a house, or other property, with funds derived from the value of the property while enabling them to continue using it.

How Does Equity Release Work?

Equity release is aimed at homeowners aged 55 and over. It allows you to take some of the value of your home as cash.

Taxes with regards to Equity Release

There’s no direct tax to pay on the money you receive from an Equity Release plan. When you borrow against your home with a Lifetime Mortgage, it’s not classed as income so there’s no income tax to pay on the money. Equity Release Mortgages are therefore not liable for capital gains tax.

Editorial Note: This content has been independently collected by the EveryInvestor advisor team and is offered on a non-advised basis. EveryInvestor may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.
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