EIS and SEIS schemes are designed to help SMEs and startups attract private investment.
They do this by offering various forms of tax relief to investors.
EIS stands for Enterprise Investment Scheme and SEIS for Seed Enterprise Investment Scheme.
Both work to attract investment in innovative businesses by reducing the financial risks involved for investors;
- The business benefits from easier access to venture capital
- The investors benefit from claiming money back on their income tax.
EIS relief is aimed at investors in SMEs that are growing. SEIS relief is for investors in startup enterprises.
How EIS Works
The individual private investor can invest a maximum of £1 million annually in a qualifying company.
To qualify for EIS, the company must have:
- Been trading for under seven years
- Fewer than 250 employees
- Maximum £15 million in gross assets
For knowledge-intensive companies carrying out research and innovation, the qualifying details are different.
They can raise more than the usual scheme limits, they can have been in existence longer, and the investor can invest more.
A qualifying EIS company must be established permanently in the UK, be unlisted on the stock exchange, and neither have control of – nor be controlled by – another company.
However, what does the investor get in return for putting money into this type of company?
Under EIS, the investor will usually:
- Receive 30 per cent income tax relief
- Pay no capital gains tax on any profits they make from the investment
- Attract no inheritance tax on shares they’ve bought through the scheme
Even if the investor makes a loss on their investment, they can offset this against their income tax.
If an investor invests the maximum amount permitted of £1 million, they can get £300,000 back in income tax relief.
To be eligible for this relief, they must hold onto the shares they purchase for at least three years.
At the same time, the company they’ve invested in must remain EIS-qualifying for this period.
When the investor sells their EIS shares, any growth from this investment is usually completely tax-free.
This is an important aspect of EIS investment because many qualifying companies do experience significant growth in their early stages.
The other form of tax benefit that EIS investors can enjoy is capital gains deferral. If they make a gain on the sale of other assets, they can reinvest this in EIS shares and defer capital gains for the lifetime of the investment.
There’s no upper limit on this.
The reinvestment should be the gain, rather than the proceeds of the sale. The deferral will apply until:
- The EIS shares are sold, or
- The company ceases to qualify for EIS within three years of the investment, or
- The investor ceases to be a UK resident within the same period.
How SEIS Works
Under SEIS, the investor can invest a maximum of £100,000 a year.
For a company to qualify, it must:
- Have been trading for under two years
- Employ fewer than 25 staff
- Have no more than £200,000 in gross assets
As with EIS, the company must be UK-established and not own or be owned by another company.
If a company issues shares under SEIS these must be ordinary, non-preferential shares.
Under SEIS, the investor will:
- Receive 50 per cent income tax relief
- Pay no capital gains tax on profits they make from the investment
- They can offset losses against their income tax
- Attract no inheritance tax on shares bought under the scheme.
In addition, they can:
- Offset losses against their income tax, and
- Claim 50 per cent capital gains tax reinvestment relief on the tax they pay on other investments, providing they reinvest this relief in a SEIS company.
If the investor holds their SEIS shares for at least three years, they will normally not pay capital gains tax on their disposal.
How Should Companies Spend their Investment Money?
For investors to benefit from either EIS or SEIS conditions, companies under either scheme must spend the investment money on qualifying business activities.
A qualifying activity is one where the company carries out trade in pursuit of profit.
There are various excluded activities that must not make up a substantial amount of this activity.
Excluded activities include:
- Banking, insurance or money-lending
- Legal or accountancy services
- Trading in land
- Property development
- Generating and exporting electricity
Any company wishing to attract investment via EIS or SEIS should check first with HMRC that they are likely to qualify.
This process is known as advance assurance. By having HMRC confirm their eligibility for EIS or SEIS, companies can attract investors more easily.
Providing a company does qualify for one or other of these schemes, they can incentivise investors. They may stand to gain considerably from their investment if the company is successful. But they’ll also be eligible for tax relief.
Even if their investment doesn’t pay off immediately, they can offset losses against their tax too.
Providing all parties involved are aware of the necessary conditions and can meet them, these types of investments can benefit all concerned.
For more information about EIS and SEIS and the advantages they offer, please call us on 020 8088 2590, email enquiries@vennaccounts.com or fill in our contact form and we’ll be back in touch asap.
