SEIS and EIS Investment Scheme for UK Startups

Every business owner tries to influence the investors in order to raise capital for their new company. There are two generous tax schemes offered by UK government i.e. SEIS and EIS which are used by new business owners to boost the equity investment of their unlisted trading companies in UK. These government schemes also provide different tax benefits to the investors.

Starting a Business?- Use these Investment Schemes to raise money for your company

The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) are the two UK government initiatives which encourage innovation by providing private investors a significant tax incentive and are intended to boost the equity investment in unlisted trading companies in the UK. Business owners planning to raise capital, can attract investment through two generous government tax schemes intended to support growth. Smaller businesses are commonly categorised as high-risk, which becomes a barrier for them to raise capital.

Before issuing shares and raising money from the investors, your business must adhere to certain criteria’s. Some of the criteria’s need to be adhered for the whole of the period of investment (generally 3 years), so the investors get the full benefit of the relief.

Which scheme suits more to your business?

For businesses looking for investment to help them achieve their medium to long-term growth plans, usually shares are provided in the company for exchange of cash and must be paid up in full when they are issued and likewise, in order to receive investment under SEIS or EIS, the funds received must be spent for a qualifying business activity.

SEIS is focused on very early-stage companies which are looking to raise up to £150,000 of investment. It’s worth noting that your company should be carrying out a qualifying trade and it must not have been carried out for more than 2 years by either your company or any other person who transferred it to your company.

EIS is aimed at businesses in the growth stage, and a company can raise investment of up to £5 million each year, and a maximum of £12 million in a company’s lifetime. If you have already received investment from the other venture capital schemes, it will count towards your £5m or £12m as per the prescribed limit and your shares for EIS investments must be ordinary shares which are not redeemable and carry no special/preferential rights to your assets or dividends.

Each investment scheme has their additional qualifying criteria such as your business segments, how many full-time employees you employ and the value of your gross assets. You will need to meet these criteria before you apply for advanced assurance from HMRC to issue shares under either of the schemes.

Point to consider- when you are planning to raise funds under SEIS and EIS both, it is vital that SEIS shares are issued before EIS shares. Practically, it means a company needs to issue SEIS share certificates first, or date them appropriately before issuing EIS share certificate and it could be as early as one day.

What are the tax benefits to investors?

What are the tax benefits to investors?

SEIS offers tax generous reliefs to investors including:

• 50% income tax relief on the amount of investment of up to £100,000 per tax year.
• Capital gains tax (CGT) exemption on disposals of SEIS shares if the investor holds these shares at least for more than three years.
• Reinvestment relief of 50% or £50,000 from capital gains if you sell any asset and use all or part of the gain to invest in shares that qualify for SEIS.
• Loss relief if the value of the investment decline instead of going upwards.
• Inheritance tax relief on the value of the shares if the investor holds these shares at least for two years.
• If shares are sold at a loss, the investor may be able to offset the loss against their other capital gains.

EIS tax benefits for investors include:

• 30% income tax relief on the amount of investment of up to £1m per tax year. From 2018/19 up to £2 million, if at least £1 million of that is invested in knowledge-intensive companies.
• CGT exemption on the disposal of EIS shares if held for the qualifying period and on which Income Tax relief was given and not withdrawn.
• If EIS shares are disposed at a loss on which Income Tax relief has been taken, loss can be offset against income for that year and the previous year and it would be beneficial instead of being offset against capital gains.
• Inheritance tax relief on the value of the shares if the investor holds these shares at least for two years.
• Capital Gains Tax can be deferred if you use your gains from the sale of any asset to make any amount of investment in a company that qualifies for EIS.

Also Read: Enterprise Investment Scheme (EIS) Checklist

How SEIS works?

Ricky is a higher rate taxpayer. In April 2016-17, Ricky has a capital gain of £80,000 from selling a property. He invested the whole gain into a new SEIS qualifying company. In 2020/21 he disposes of his SEIS shares for £200,000, generating a profit of £120,000.

Taxation benefits in 2016-17:

Income tax relief - £40,000 (£80,000 x 50%)

CGT reinvestment relief - £11,200 (50% x £80,000 x 28%)

Tax Benefits in 2020-21

Provided that all the qualifying conditions have been met, his CGT of £24,000 (£120,000 x 20%) will be fully exempt.

In the above example, the whole of £40,000 gain (circa £11,200 CGT) becomes exempt from CGT because of the reinvestment relief.

How EIS works?

In April 2016-17, Ricky had a capital gain of £80,000 from selling a property He invested £100,000 in 2016-17 into an EIS approved company. In 2020/21 he disposes of his EIS shares for £200,000.

Taxation benefits in 2016/17:

Income tax relief – £24,000 (£80,000*30%)

CGT deferral relief - £22,400 (28% x £80,000*100%)

Taxation benefits in 2020/21:

Provided that all the qualifying conditions have been met, his CGT of £24,000 (£120,000 x 20%) will be exempt whereas the taxes on gains made on property in 2016/17, which he deferred crystallises, but taxed at 20% instead of the 28% and he has to pay £16,000 in CGT.

In the above example, the whole gain of £80,000 is deferred initially but becomes payable when the shares are sold and taxed at a reduced rate of 20% compared to 28% tax on residential properties.

Things to consider while procuring investment

As its high risk investment, so most of the investors will require advance assurance that whether your company is qualified for SEIS or EIS. For getting advance assurance from the HMRC, you need to submit an application before you start offering investors with SEIS or EIS investment opportunities.

For the purpose of application, HMRC will ask the details of at least one proposed investor, require your business plan, 3-year financial forecast, a copy of your latest accounts (if available), a cover letter, an EIS checklist and other supporting documents.

Note that if you are a businessman & planning to raise capital through these two government schemes i.e. Enterprise investment scheme and Seed enterprise investment scheme, you must have a understanding that whether your company qualifies for SEIS or EIS and the tax benefits investors can avail as per the eligibility.

For more details about SEIS or EIS, please speak to one of our investment experts on 0330 88 6686.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.