Why your start-up should be considering EIS and SEIS tax reliefs

SEIS and EIS are very similar schemes intended to encourage investment in high-risk, small, unquoted companies which have objectives to grow and develop their trade. There are no particular tax reliefs for companies but the schemes provide good tax incentives for investors. There are certain conditions that companies must meet in order to qualify under the schemes.

Seed Enterprise Investment Scheme (SEIS)

SEIS is designed for very early-stage new businesses which would otherwise struggle to raise finance. For example, a qualifying company must have less than 25 full time equivalent employees, the value of the company’s total assets cannot exceed £200,000 (this will go up to £350,000 from April 2023) immediately before the share issue, maximum investment that a company can raise through SEIS is £150,000 and this will increase to £250,000 from April 2023. There are also certain trade and age conditions as well as conditions for the use of funds that a qualifying company must meet.

Enterprise Investment Scheme (EIS)

Enterprise Investment Scheme (EIS) – This scheme is very similar to SEIS but is aimed at larger unquoted trading companies. For example, a qualifying company must have less than 250 full time equivalent employees (less than 500 for knowledge intensive companies), the value of the company’s gross assets before the investment must not exceed £15m and £16m after the investment, maximum investment the company can raise through all venture capital schemes must not exceed £5m in the 12 month period (with a lifetime limit of £12m) and £20 for knowledge intensive companies. There are also certain trade and age conditions as well as conditions for the use of funds that a qualifying company must meet.

Qualifying investor:

To qualify for relief, the investor cannot be connected with the company. Broadly speaking, the investor is connected, if he/she is an employee or a director of the share issuing company (although in some cases directors may qualify) or they hold more than 30% of the issued ordinary share capital. Also, they cannot be existing shareholders unless they hold subscriber shares or shares issued under EIS/SEIS or other venture capital scheme.

There are three tax reliefs available under these schemes:

Income tax relief

SEIS: Qualifying investors get income tax relief of 50% of the amount invested on the maximum investment of £100,000 (or £200,000 from April 2023). Income tax relief is given by way of a tax reducer which can reduce tax liability to nil.

EIS: Qualifying investors get income tax relief of 30% of the amount invested on the maximum investment of £1m (or £2m in knowledge intensive companies). Similar to SEIS, income tax relief is given by way of a tax reducer and works in the same way as SEIS tax reducer.

Any unused SEIS/EIS investment can be carried back to previous year.

If shares are sold within 3 years, income tax relief claimed will be withdrawn either in full or partially.

Income tax relief example

For example, Jane invests £10,000 in SEIS qualifying shares on 1 March 2023. She can claim income tax relief of £5,000 (£10,000 x 50%) against her 2022/23 tax liability. If she subsequently sells the shares on 1 March 2025, income tax relief received in 2022/23 will be withdrawn. The amount withdrawn will be based on sales proceeds in March 2025. However, no claw back will be due if she sells the shares after 1 March 2026.

CGT disposal relief:

If the shares are sold after 3 years, the gain is exempt from CGT (provided income tax relief was originally claimed) and capital loss is allowable, however it may be restricted.

When Jane subsequently sells the shares after holding them for 3 years and makes gain, any increase in value will be fully exempt from CGT provided income tax relief was claimed.

However, if the shares are sold at a loss, the loss will be allowable for deduction (however it may be restricted). Normally capital losses are only allowable for deduction against capital gains but in case of losses made on the sale of EIS/SEIS shares, a claim can be made to offset the loss against income tax liability of the current or prior year.

If shares are sold within 3 years, no CGT exemption will apply on gain, however loss will still be allowable even though might be restricted.

CGT deferral relief:

CGT deferral relief is available where a qualifying investor reinvests a gain realised on disposal of any assets in qualifying SEIS/EIS shares within the qualifying period.

SEIS reinvestment relief – The relief allows 50% of the SEIS investment to be exempt from the corresponding gain.

EIS reinvestment relief – The relief works by way of ‘freezing’ the deferred gain until the EIS shares are sold.

CGT example

For example, Jane sold an asset for £80,000 making a capital gain of £20,000. She then decides to invest £10,000 in qualifying SEIS shares. This will allow her to get CGT exemption of £5,000 (50% of the invested amount of £10,000) against the gain of £20,000. This brings her chargeable gain down to £15,000.

This is a complex area which may involve considerable sums of money. If you are thinking of using an EIS or SEIS to raise money, it’s wise to take advice from a specialist accountant with experience in EIS and SEIS. They can guide you through the do’s and don’ts as well as submitting advance clearances to HMRC and dealing with the necessary EIS paperwork for both the employer and investor.

We have many years of experience assisting companies with EIS and SEIS applications across many industries. Recent cases have involved drone technology, Artificial Intelligence systems and development of contactless payment systems to name but a few.

Do please get in touch and we can discuss EIS and SEIS investment relief.

NB: The above examples are for illustrative purposes only and every taxpayer’s circumstances will be different. Consequently, no action should be taken on the basis of the examples set out above.