EIS & SEIS – Great for attracting investment

The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are government- backed schemes offering great tax efficient benefits to investors in return for investment in qualifying start-up companies seeking early stage equity investment. .

EIS
Benefits to Companies

Under EIS qualifying companies can raise up to £5 million each year, with a maximum investment of £12 million in the company’s lifetime (this includes amounts received from other venture capital schemes).

There are a number of criteria the company must meet in order to issue shares under the scheme, in addition to what the money raised can be used for and the type of shares that can be issued under the scheme.

Investors will only be able to claim tax relief if the company meets the conditions for EIS. Companies can seek advance assurance from HM Revenue and Customs (HMRC) that they are likely to comply before they go ahead.

Please note there are different EIS rules for ‘knowledge intensive companies’.
From the 6 April 2018 a new ‘principles-based test’ was announced in the Autumn Budget 2017 for granting companies EIS status.
Benefits to Investors
The main benefits to investors in an EIS scheme are the tax reliefs available as summarised below:

Income Tax:

  • Income tax relief of 30% of the amount invested
  • Maximum investment of £1 million per tax year per individual
  • Some or all the allowance can be carried back to the previous tax year (therefore in theory £2 million can be invested with £1 million being carried back to previous tax year)

Capital Gains Tax:

  •  Exempt from CGT if shares held for a minimum of 3 years then sold
  •  Payment of CGT can be deferred when the gain is invested in shares of an EIS qualifying company (subject to certain conditions)

Inheritance Tax:

  • Shares in EIS qualifying companies will generally qualify for Business Property Relief for Inheritance Tax purposes at rates of up to 100% after two years of holding such investment, so that any liability for Inheritance Tax is reduced or eliminated in respect of such shares

Loss Relief:

  • If shares are disposed of at a loss, the investor can elect that the amount of the loss (less any income tax relief given) to be set against income of the year in which they were disposed or, on income of the previous year instead of being set against any capital gains
    Shares must be held for a minimum of 3 years before selling them to qualify for the above tax benefits.

SEIS
Benefits to Companies

The SEIS scheme is designed to help small and early stage start-up companies raise capital when they are starting to trade.
A company can raise a maximum of £150,000 via SEIS investment.

There are a number of qualifying criteria SEIS companies must meet and the shares issued must meet the same criteria as for EIS.
Investors will only be able to claim tax relief if the company meets the conditions for SEIS. Companies can seek advance assurance from HM Revenue and Customs (HMRC) that they are likely to comply before they go ahead.

From the 6 April 2018 a new ‘principles-based test’ was announced in the Autumn Budget 2017 for granting companies SEIS status.

Benefits to Investors
The main benefits to investors are the tax reliefs are summarised below:

Income Tax:

  • Maximum of £100,000 in a single tax year, which can be spread over a number of companies
  • Initial income tax relief of 50% regardless of the investor’s marginal rate of income tax
  •  Income tax carry back relief to preceding tax year

Capital Gains Tax:

  • CGT exemption on the sale of the shares provided the qualifying criteria are satisfied throughout the minimum 3 year holding period
  • a 50% relief from CGT on gains realised from other assets disposed of in the tax year, provided the gains are reinvested in a qualifying SEIS investment

Inheritance Tax

  • 100% inheritance tax relief against the value of the shares is granted two years after the date of the initial purchase

Loss Relief:

  •  If the shares are disposed of at a loss, the loss can be offset against the investors income at the individual’s highest income tax rate (less and income tax relief given)