There are a staggering range of tax relief incentives on offer to encourage investment in tech companies.
Tax concessions available for technology companies and their investors
- Making a tech company attractive to investors;
- Providing shares for employees in technology companies;
- Tax on the sale of shares held by investors; and
- Succession planning for a technology company.
Making tech company attractive to investors
Whether raising investment from angel investors or crowdfunding, availability of tax reliefs always attracts more investors.
Crowdfunding tax reliefs
SEIS and EIS tax reliefs apply to investments made via crowdfunding platforms, provided that the company and the investor qualifies.
Tax reliefs for tech angel investors
Technology companies qualify for a range of tax reliefs for angel investors:
- Reinvestment Relief;
- Deferral of Tax;
- SEIS and EIS tax reliefs;
- Business Investment Relief for non-domiciled investors;
- HMRC approved employee share plans for the directors and employees of technology companies;
- Business Assets Disposal Relief (Entrepreneurs’ Relief) and Investors’ Relief on the sale of a technology company.
Reinvestment Relief of capital gains when investing into SEIS/EIS shares
Capital gains on the disposal of assets (e.g. gains from a sale of shares) can be partially exempt from capital gains tax if the gain is reinvested in qualifying SEIS or EIS shares in the same year. Up to £50,000 of gain can be exempted under SEIS.
Another way to reduce capital gains tax on a sale of assets is to defer the gain against an investment into new company shares. The tax will only become payable after the new company’s shares are sold.
Income tax relief on investment in a tech company
Angel investors can claim income tax relief when they invest in qualifying SEIS or EIS shares. Shares in a technology company are likely to qualify. The investor can claim:
- 50% income tax relief for SEIS investment; and
- 30% income tax relief for EIS investment.
SEIS and EIS give investors an immediate tax advantage on investment. If income tax was overpaid, an investor can get a refund.
To qualify for SEIS or EIS the investors must meet the following criteria:
- The investor must make a genuine commercial investment;
- The investor can’t have substantial interest in the company;
- The investor must not make loans connected to the investment; and
- The investor must not be an employee of the issuing company (but directors qualify in certain circumstances).
HMRC confirms whether the company qualifies for SEIS and EIS. There are time limits and procedures to observe. We help investors in tech companies claim SEIS and EIS tax reliefs.
Rolling SEIS backwards
An investor can choose to treat all or some shares issued under SEIS or EIS as issued in the previous tax year to maximise the advantage. This means that the investor can achieve an income tax advantage in two tax years. Reinvestment Relief can be also carried back.
Business Investment Relief
UK resident but non UK domiciled individuals (or their partners) who pay tax on the remittance basis in the UK can invest in a UK tech company shares or loan capital. The benefit of Business Investment Relief is that the money invested in a company is not treated as remitted into the UK and not subject to UK taxes but stringent qualifying conditions apply.
To qualify the investor must:
- Make a qualifying investment;
- The investor can use a nominee to make an investment;
- Make an investment with 45 days of bringing the funds into the UK.
Unlike SEIS and EIS there are no limits on how much can be invested by an individual investor under Business Investment Relief.
Providing shares for employees in tech companies
Equity structures are common in tech companies. We explain how equity can be provided to employees in tech companies.
Providing shares to employees in tech companies
Awarding shares to employees in tech companies can be costly. Tech company shares are valuable. Tax implications for the employee may be severe. We help award shares to employees in the most tax efficient way.
Providing options to employees in tech companies
Most technology companies are qualifying companies for the purposes of HMRC approved share plans, such as EMI or CSOP. Granting options to employees gives tax advantages when the company is sold.
Capital gains tax on the sale of a technology company
Tech companies typically sell for high multiples. Getting the tax on the sale right is key.
Business Assets Disposal Relief (Entrepreneurs’ Relief) on the sale of shares
Shareholders can enjoy a reduced rate of CGT when they sell their shares under the regime known as “Business Assets Disposal Relief” (entrepreneurs’ relief) under which the rate of tax drops to 10%. Tech companies qualify.
If the business awards EMI options the shares acquired on exercise of EMI options by the option holders will qualify for Business Assets Disposal Relief (entrepreneurs’ relief).
Investors’ Relief on the sale of shares
Passive investors in tech companies enjoy 10% capital gains tax rate on the sale of tech company shares, provided they hold them for at least 3 years. There is no minimum shareholding requirement.
SEIS/EIS shares – no capital gains tax to pay
If you subscribed for your shares under SEIS or EIS then you will not have to pay Capital Gains Tax on a gain on your disposal of the SEIS or EIS shares. You will meet the conditions if:
- you have held the SEIS or EIS shares for at least 3 years (or if trade started after subscription 3 years from the start of trading); and
- you have received income tax relief in full on the whole of your subscription(s) for the SEIS or EIS shares and the income tax relief has not been withdrawn.
Succession planning in a technology company – tax on death
Shares can pass to your estate free of inheritance tax. In a nutshell the shares can be transferred under your estate free of inheritance tax if you qualify for Business Property Relief. That requires:
- The business is a trading company – generally quoted companies and investment companies will not qualify; and
- Must not be an asset in a holding company; and
- The company must not deal in securities, stocks or shares or carry out any other prohibited activity.
Change of voting rights following death of a shareholder
In private companies often the remaining shareholders do not want the family members receiving the shares to hold the same voting powers as the deceased. We do review articles and shareholders’ agreements to include powers for remaining shareholders to continue running the business.
Cross options permitting acquisition of shares following death
Another area to consider is the use of cross options. Cross options can be backed by insurance policies to finance the buy back of shares from the estate. A cross option will give named shareholders the right to acquire the deceased shares. We review practical aspects such as allowing time for the shareholders to arrange finance for any acquisition.