1. Invest in a small trading company under the Seed Enterprise Investment Scheme (SEIS) and gain 50% income tax relief on an investment of up to £100,000. Capital gains on SEIS shares are exempt from tax if the shares are held for at least three years and, for 2012/13 only, a tax exemption is available for any capital gains realised in that year and invested under the SEIS. But be warned – investing in small companies can be risky and you must hold SEIS shares for three years in order to retain your income tax credit.
2. Obtain 30% income tax relief by subscribing for shares in a Venture Capital Trust (VCT) or in an Enterprise Investment Scheme (EIS). In 2012/13 the maximum subscription in VCT shares is £200,000. The shares are also exempt from CGT when they are sold. A subscription in EIS shares costing up to £1 million will give you the income tax credit. In addition, you can defer tax on your capital gains by reinvesting an unlimited amount of gains in EIS shares. VCT and EIS shares can be risky investments and you must hold VCT shares for at least five years, and EIS shares for three years, in order to retain your income tax credit.
3. Think about how you should start your business -- as a sole trader, partnership or limited company. Companies still have tax advantages, but generally only when the business has started to make a profit. With a new venture, you might expect to make losses in the early years. As a sole trader or partnership, your initial losses can be carried back to set against your income in the three years before you started the business. This is subject to antiavoidance rules which may restrict the use of losses from April 2013.
4. Incorporation can still be worthwhile. Based on current personal and corporation tax rates, a business with profits of £40,000 can save tax and NICs of some £3,000 if operated through a company, compared to operating as a sole trader, provided you extract most of your earnings as dividends. Furthermore, it is planned that corporation tax rates will continue to fall in the next few years.
The Financial Conduct Authority (FCA) does not regulate tax advice, so it is outside the investment protection rules of the Financial Services and Markets Act and the Financial Services Compensation Scheme.
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