While investment opportunities come in all shapes and sizes, one of the most popular is capital investment; an investment strategy that is utilised by more than 70% of UK startups.
This is due to the fact that the UK has developed a unique ecosystem over the past 20 years, making it simple for startups to gain access to private funding and for investors to access startup investment opportunities. SEIS and EIS are credited for this; two schemes designed to offer generous tax incentives to investors that invest in early-stage businesses. This in turn makes investing in ‘risky’ startups a more attractive proposition.
Below, we provide both startups and investors with vital information on these two schemes.
SEIS vs EIS
Although the two schemes are similar, there are some important differences, benefits and criteria that all startups and potential investors need to be aware of. In this blog post, we cover the most vital.
An Introduction to SEIS
The Seed Enterprise Investment Scheme (SEIS) is a scheme that is aimed at very early-stage companies; companies that are still in the development stage. In essence, it permits an individual to invest up to £100,000 per tax year in startups and receive a 50% tax break when doing so. To be eligible for SEIS, a company must be raising no more than £150,000. This is one of the main differences when comparing SEIS to EIS.
Created by the UK Government, the SEIS scheme offers significant capital gains tax reductions, amongst other benefits. Below, we explore these in more depth.
SEIS Income Tax Relief - Businesses that invest in seed-stage companies can get 50% of the value of that investment back in the form of income tax relief. For instance, if an investment of £10,000 is made, the investor can save £5,000 in income tax.
SEIS Capital Gains Tax Relief: While making a successful investment is great, it can often be counteracted by Capital Gains Tax. Via SEIS, investors that sell their shares after 3 years will pay 0% Capital Gains Tax on the investment gains.
SEIS Capital Gains Tax Reinvestment Relief: It is also worth noting that if you choose to reinvest profits made from other non-SEIS investments into an SEIS eligible company, you will receive 50% Capital Gains Tax relief on the initial investment.
SEIS Loss Relief: If the investment you make in the startup loses money, there is an option to claim SEIS Loss Relief which will be equivalent to the highest rate of income tax that you pay. Therefore, if you pay 45% income tax, you can claim up to 45% of your net loss in income tax relief.
Previous Year Tax: Another advantage to investing via this scheme is that investors can use a carry-back facility which allows them to treat shares as if they were acquired in the preceding tax year. There are many financial benefits to doing this.
SEIS Inheritance Tax Relief: Once you have had your shares for 2 years, there will no longer be any Inheritance Tax on their value.
Criteria for SEIS
There are understandably some criteria and restrictors when investing in SEIS eligible companies. Here are the more noteworthy:
- The company must not have £200,000+ of gross assets when the new shares are issued.
- The company must be less than 2 years old to qualify for SEIS
- The Investor must be over 18 years old
- The Investor must not be employed by the company in which they invest
- SEIS must not to be used for tax avoidance
- The Investor must hold shares for at least 3 years
An Introduction to EIS
The EIS (Enterprise Investment Scheme) is a scheme that was launched by the government back in 1994. The scheme has successfully helped small businesses to develop, grow and innovative by ensuring such companies can access the investment they need to meet their market potential.
The scheme is aimed at companies that are slightly more mature than seed stage. Please note that when raising funds through EIS, a company can be raising up to £5 million.
In exchange for helping innovative smaller companies to create jobs and aid economic growth, investors can benefit from significant income tax and capital gains reliefs.
EIS Income Tax Relief - EIS income tax relief is claimed at 30% of the amount invested in the tax year in which the investment is made. Therefore, if you invest £100,000 in an EIS business, you could save a huge £30,000 in income tax.
EIS Capital Gains – If you decide to keep your shares for 3 years or more than all the profits you have gained from the investment will not have Capital Gains Tax applied to them when you do decide to sell them. For instance, if you invest £100,000 into an EIS company and the shares you buy are worth £300,000 in three years when you come to sell them, the £200,00 gains that you have accrued will be 100% exempt from Capital Gains Tax.
EIS Loss Relief: While every investor goes into a deal wanting their investment to swell, in some cases it just isn’t the case. In order to soften the blow of a loss, the UK Government introduced EIS Loss Relief. Like SEIS, the loss relief percentage will sit at the equivalent rate to the highest rate of income tax that you pay. For example, if you pay 45%, you can claim back 45% of your loss in the form of income tax relief.
Carry-back: Investors can treat some or all of the shares as being issued in the previous tax year.
EIS Inheritance Tax Relief: Once you have had your shares for 2 years, there will no longer be any Inheritance Tax applied to them.
Criteria for EIS
Like any tax incentive, there is criteria that needs to be met. In order to claim EIS benefits, investors need to:
- Be a UK taxpayer.
- Invest a maximum of £1m in EIS eligible companies during one tax year
- Refrain from selling or gifting shares within three years. If you do sell/gift them within that timeframe you will be subject to relief clawback.
- Be purchasing new shares in the company
Are you looking to invest in EIS or SEIS companies?
If you are looking to invest some surplus money and want to explore how SEIS and EIS can help you do so in a tax-efficient way, we at Lime Advisory are here to assist. Alternatively, if you are a startup looking to raise capital, we would be more than happy to help with your fundraising round.
Contact us today and allow the Lime Advisory team to help you reach your financial goals.