Christmas 2024: The Business Angel

In this year's Tax & Accounting at Christmas Special, we review the tax and accounting treatments of items that relate to the festive season. Let's take a closer look at the tax breaks available for [business] angels. 

The Business Angel

Angels play a starring role in the Christmas nativity, and they also serve a pivotal role in providing start-up and seed funding during the early stages of new businesses. 

Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) 

The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) intend to promote external investment in small unquoted trading companies by providing Income Tax and Capital Gains Tax (CGT) relief, subject to certain conditions. 

An investment can be treated as having occurred in the prior year for tax purposes. E.g. an investment made in 2024/25 could reduce your 2023/24 tax bill (due 31 January 2025).

See SEIS & EIS: tax relief examples

The conditions for relief:

The conditions for eligibility are strict. Whilst the EIS and SEIS requirements are similar, there are key differences which should not be overlooked.

• Shares must be newly issued fully paid-up ordinary shares
• The investor must have held the shares for least three years, otherwise there is a claw-back of income tax relief and no CGT relief on disposal. 
• The company must carry on a Qualifying trade and not participate in excluded activities.
• The company must be below a certain size and, for SEIS, have been trading for less than 3 years. 
• The funds raised must be used for Qualifying activities within a set time period.
• The investor must not be connected to the company, either directly or via their associates. Directors can qualify, but care must be taken to ensure the connection test is not breached. Business angels can receive a reasonable remuneration for services and expertise and not be treated as connected.
• Each relief has an investment cap beyond which no relief is available. SEIS is £250,000. EIS is £5m per year, with a lifetime cap of £12m. The EIS limits are higher for “Knowledge intensive companies”. 
• The new “Risk to capital”  condition must be met.
• It is possible to claim EIS relief on shares in a company that previously qualified for SEIS relief but not vice versa; once EIS relief has been claimed for a company SEIS relief is no longer possible.

Advance assurance can be applied for from HMRC before shares are issued to ensure that they will qualify for relief.

See, Which investment relief: IR, ER, SEIS or EIS?

Investors’ Relief (IR)

Investors' Relief (IR) reduces the CGT charged on qualifying gains to 10%, subject to a lifetime cap of £1 million (£10 million before 30 October 2024). The relief is designed for investors who are not actively involved in the business. Unlike, Business Asset Disposal Relief (BADR) there is no minimum percentage shareholding requirement.

At the Autumn Budget 2024 it was announced that:

• The Rate of IR will increase to 14% from 6 April 2025, and increase further to 18% from 6 April 2026 (subject to transitional rules), and
• The lifetime limit for IR will decrease to £1,000,000 for disposals made on or after 30 October 2024. This limit takes into account the value of relief claimed on all past qualifying gains (subject to anti-forestalling rules). 

To qualify for IR:

• The original investment of unlisted shares in a trading company or holding company of a trading group must have been made on or after 17 March 2016 and held for three years from 6 April 2016.
• Investors or persons connected to them must not be officers or employees of the company on subscription. Business angel investors may later become unpaid directors or, in some cases, paid employees. 

See, Investors' Relief (IR) (Subscriber guide)

Business Investment Relief  

• Business Investment Relief allows non-UK domiciled UK residents taxed on the remittance basis to remit offshore income and gains to the UK tax-free for investment in qualifying UK companies.
• From 6 April 2025 the remittance basis of taxation for non-UK domiciled individuals will be abolished and replaced with a new residence-based regime.

See, Business Investment Relief (Subscriber guide) 

Difficult areas

• The Correct forms must be filed with HMRC to enable investors to claim relief; filing an EIS return form for an SEIS claim will invalidate the relief.
• Relief will be denied where the shares have preferential rights. See SEIS & EIS for several cases where this occurred. 
• Relief may be withdrawn when a Company is taken over by another company

Links to our subscriber guides:

EIS: Enterprise Investment Scheme 
When can EIS relief be claimed?  What are the conditions for EIS relief?  What are the benefits of EIS relief?

SEIS: Seed Enterprise Investment Scheme
When can SEIS relief be claimed?  What are the conditions for SEIS relief?  What are the benefits of SEIS relief?

SEIS & EIS: Investor relief briefing
How do the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) work in practice for investors? This is a client briefing note.

IR: Investors' Relief (IR) 
What is Investors' Relief? How does it differ from Business Asset Disposal Relief? Which disposals qualify? What are the conditions?

BADR: Business Asset Disposal Relief (Entrepreneurs' Relief): Disposal of shares or securities in a company 
When can you claim Business Asset Disposal Relief (BADR) on a share sale? What is the rate of Business Asset Disposal Relief (Entrepreneurs' Relief)? How do you claim BADR? What case law is there on BADR?

Business Investment Relief
Business Investment Relief is a special relief for non-UK domiciled individuals designed to encourage them to remit funds to invest in UK businesses.