Despite it being fairly obvious of the need to reduce debt and increase equity in businesses (and everything else) the government has been slow to appreciate this. As a result efforts have been concentrated on Project Merlin and other large scale bank funding initiatives which were always doomed to failure. Meanwhile, private individuals have been starting to invest in businesses. Increasingly the Treasury realises the need to support such initiatives and the Autumn Statement included a number of measures which will be a feature of private client tax work over the next couple of years (at least).

Private individuals (especially the older generations) are sitting on a lot of cash and investments that could be used for investment in SMEs. The thing is that they do not want to invest it. Low bank interest returns and new schemes in the market have been having some effect but the government is now boosting this with changes to the Enterprise Investment Scheme and VCTs and a new Seed Enterprise Investment Scheme (SEIS) from April 2012.

The government is clearly keen for this relief to be very tightly targeted and does not want lots of marketed schemes that manipulate the relief by achieving tax refunds for investors into vehicles that are not “true” new start enterprises. However, there is the rub. If the relief is too restrictive then it will be a headline grabber now but will not really do any long term good for the economy.

The potential tax relief on offer from SEIS is huge – 50% income tax and potentially 28% capital gains tax. Business property relief should also apply after two years – so you could argue that the tax relief could be over 100%. It is too good to miss for wealthy taxpayers looking to invest. However, the government’s desire to avoid a heavily marketed scheme and the short time-frame for the very high relief will mean that an “industry” cannot readily develop around this relief. Despite this, it will be interesting to see how the small business funding brokers and business angel networks approach this. If they can get their act together then there should be plenty of possible investments around – the question then will be deal costs if accountancy profession is asked to advise on the possibility.

If this incentive is to work then private client advisers are going to be doing plenty on this in the second half of 2012/13 and in Spring 2013 in particular. To make the most of the relief it is important to be getting the benefit of the capital gains tax holiday. That may well mean crystallising gains as the time window of a single tax year is too short for simple re-investment. Also, the aim will be to reinvest 28% tax gains and not 10% ones.

I am sure that there are opportunities to combine the SEIS relief with pension planning for high earners, probably where SIPPs are involved. I can imagine a scenario whereby an in-specie contribution of shares is made to a SIPP (crystallising capital gains) and obtaining 50% income tax relief. A SEIS investment is also made such that the capital gains holiday applies and a further 50% income tax relief results. A sort of buy one, get one free. Regardless of this more complex planning, straightforward VCT investment followed by a pension contribution when the VCT matures works well – perhaps now with a 50% rate still in place for many years to come.

It certainly looks like existing personal tax rates and bands are with us for some time to come. The personal income tax allowance is increasing to £8,105 in 2012/13 but both the capital gains tax annual exemption (£10,600) and the higher rate income tax threshold (£42,475) are frozen (as indeed are the £100,000 and £150,000 limits). A further flipside of the increase in the personal allowance is that the pernicious and nasty clawback of that allowance above £100,000 is now extended so that a 60% tax rate applies from £100,000 to £116,210. Talk about disincentives to enterprise! One is also left with the feeling that there is still worse to come.