If you’re raising early-stage investment in the UK, you’ll likely be aware of the SEIS and EIS investment schemes, but what do these schemes actually mean? In this article, we answer some of the most commonly asked questions about the schemes, share what they mean for both businesses and investors, the benefits and how to apply.
The SEIS (Seed Enterprise Investment Scheme) and EIS (Enterprise Investment Scheme) are tax incentive schemes introduced by the UK government to encourage investment into early-stage companies by high net worth individuals (HNWIs). Investments into eligible companies are subject to significant tax breaks.
Early-stage investments are inherently risky but at a state-level, they are considered to be a critical driver of the entrepreneurial ecosystem. In the UK alone, 835,000 new businesses were started in 2020 and it’s likely that less than half of them will still be around in 5 years time. As those taking on a significant amount of the risk by investing at the early stage, S/EIS was introduced so that angel investors and other EIS funds (whose LPs are angel investors more often than not) were more comfortable with absorbing some of the risk and were therefore inclined to invest more capital into early-stage companies. And as a result, start-ups have a larger pool of capital from which to draw potential investment.
The scheme has proved wildly popular with more than £20bn poured into eligible companies via the scheme since it came into existence in 1993.
Most young companies do qualify for SEIS and EIS funding, but a number are excluded from the schemes entirely. Excluded activities include those dealing in land or commodities, those involved with banking, insurance or money-lending, those providing legal or accountancy services, those involved in property development and those generating and exporting electricity.
Note, the company must have a UK presence. This means that the company has either:
A company is only eligible as long as they don’t control another company (there is flexibility for certain types of subsidiary companies) and they also cannot be controlled by another company nor have 50% of the shares owned by another company.
A company can only raise up to £150,000 of SEIS and up to £12m of EIS in their lifetime.
In any given 12 months, a company cannot raise more than £5m of EIS.
A company cannot have been trading for more than 2 years when raising SEIS and 7 years when raising EIS.
A company cannot have more than 25 full time employees when raising SEIS and 250 employees when raising SEIS.
At the time of raising, a company cannot have more than £200,000 of gross assets when raising SEIS and £15m when raising EIS.
HMRC very recently introduced something known as knowledge intensive EIS status which extends the amount that you can raise to £20m and the timeline over which you can raise those funds to 10 years. These are specifically for companies that are developing significant IP or carrying out comprehensive levels of research and development.
Any shares that are issued under the EIS scheme must be held for a minimum of 3 years in order for investors to actually realise any benefits from the scheme.
For investors, they cannot claim more than £150,000 of SEIS in any 12 months or more than £1m of EIS in any 12 months.
Income Tax Relief
Capital Gains Tax Relief
Inheritance Tax Relief
Worked Example of an investment of £300,000
This example shows that in the worst case scenario (even if the investment value falls to completely zero) investors would lose just 38% of their original investment.
For individual investors in the UK, prospective investee companies having SEIS/EIS advanced assurance can often be a prerequisite. Many investors, and specifically syndicates and funds, will state openly on their websites whether SEIS/EIS status is a requirement for them to invest.
However it’s worth noting that SEIS/EIS cannot be claimed by investors in the following scenarios:
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