Why startups did better than pasties in the budget

Amongst the maelstrom of pasty, caravan and charitable giving budget screw-ups, very little seems to have been written about what the UK Government has done on investment into early stage startups which is a shame, because it’s very good news.

The main announcement was a new scheme called the Seed Enterprise Investment Scheme (pdf) which has many similarities to the old EIS but is aimed at investing in very early stage startups (less than 2 years old, less than 25 staff and with assets of less than £200k). I went along to a workshop this week by Keystone Law to find out more. I think all the details below are correct but it’s worth getting advice yourself.

If you invest in a qualifying company straight away you get 50% of the amount you invest off your income tax bill for that year. So if you invest £25,000 you’ll get £12,500 off your income tax. Provided you hold onto the shares for 3 years you’ll also be exempt from any capital gains tax when you sell them which if everything goes well could be pretty substantial. And if everything goes wrong and the company goes belly up, you’ll get a further 28% of your investment off your tax bill (£7,000 in our example above). So, in effect, a ‘failure’ only costs you 22% of your investment — you’ll only have lost £5,500.

All in all it makes investing in early stage companies for people with a bit of money very attractive. There are of course lots of rules around it — the Treasury have to justify their existence somehow — but if you follow them and get a bit of legal help along the way, it’s a very tempting way to invest your money, especially if you’ve just come into a bit of money in this tax year — there’s an extra bonus for 2012/13 which allows you to put money from capital gains straight into shares in a new company and not pay capital gains tax.

I also think it’s interesting because it makes investing in early stage companies comparable in tax advantages to charitable giving. It used to be that if you wanted to ‘do good’ with your income the only way was to give money to a charity or sneak it off to another country that was more ‘tax efficient’. But that’s changing. I hope we see a culture shift so that people who’ve been fortunate start to really invest in the next wave of companies trying to solve real problems.

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