What the SEIS and EIS investment schemes mean for you

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What are SEIS and EIS?

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.

Why do the schemes exist?

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.

What kinds of businesses can apply for SEIS and EIS?

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 fixed place of business in the UK through which the company’s business is partly or wholly carried out, or
  • A UK-based agent who acts on behalf of the company and habitually exercises the authority to enter into contracts on behalf of the company.

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.

What are key limits to be aware of?

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.

Benefits of S/EIS

Income Tax Relief

  • Under SEIS, investors can claim back up to 50% of the value of their investment in the form of income tax relief.
  • Under EIS, investors can claim back up to 30% of the value of their investment in the form of income tax relief.

Capital Gains Tax Relief

  • If investors hold the shares for at least 3 years, then all gains that accrue on those shares may be exempt from Capital Gains Tax when investors come to sell them.
  • If investors don’t hold the shares for at least 3 years, investors will not have to pay Capital Gains Tax until a later date if investors dispose of an asset (any asset) and use the gain they made on that asset to invest in shares in a company that qualifies for EIS. Investors will then usually have to pay the Capital Gains Tax when you dispose of the EIS shares.

Loss Relief

  • If the business performs poorly and investors lose the money on their investment, they may claim loss relief.
  • The loss relief investors can claim is at the equivalent rate to the highest rate of income tax they pay. For example, if they pay income tax at a rate of 45%, they can claim 45% of their net loss in income tax relief.

Carry-back Relief

  • Investors can treat some or all of the shares as being issued in the preceding tax year, as long as they had not reached the limit for the value of S/EIS shares purchased in that year.
  • If, for example, someone invests £10,000 in an EIS eligible company in the 2018-19 tax year, their income tax relief would be £3,000 (30% of £10,000). They can apply to have that £3,000 carried back to the previous tax year (2017-2018) and relieved against their tax in that year, as long as they had not acquired more than £1,000,000 worth of EIS shares in that year.

Inheritance Tax Relief

  • Investors can generally claim Inheritance Tax relief of 100% after two years of holding the EIS shares. This means that any liability for Inheritance Tax is reduced or eliminated in respect of such shares. However, this relief is not available if the shares are listed on a recognised stock exchange.

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.

How important are the schemes for investors?

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:

  • If the investor is planning to invest through a limited company
  • If the investor is not living in the UK
  • If the investor is receiving any kind of preferential shares
  • If the investor is an employee, partner or paid director of the company

Any other nuggets of advice?

  1. If you’re considering crowdfunding and are attaching some investor rewards, ensure that the individual rewards are not valued at over £1,000 as that can compromise an investor’s EIS eligibility. This is often the first piece of information an investor wants to know so, if your company is eligible, don’t even think about raising investment without first applying to HMRC to offer EIS/SEIS shares
  2. Ensure that you have a tax advisor on hand to make sure you’re making the right decisions when it comes to the tax schemes. And we mean a real tax specialist, not an existing shareholder, a crowdfunding platform or any other kind of advisor.
  3. As part of the application process to HMRC, you often have to prepare and provide a set of financial projections and a business plan so that they can ensure there is significant risk attached to the company and that you’re spending the cash on qualifying activities. Check out the Gov.UK website for more information.