What is EIS & SEIS?
Contributor: Simon Strojan
EIS & SEIS
The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) are two government initiatives that aim to encourage innovation by offering UK tax payers a significant tax break for investing in early stage, growth-focused and high-risk companies.
EIS is focused on medium size start-ups and allows an individual to invest up to £1 million per tax year and receive a 30% tax break in return. The investor will also pay no capital gains tax on any profit arising from the sale of shares after three years.
SEIS is focused on very small sized start-ups and allows for an even bigger tax break of up to 50% on investments up to £100,000 per tax year. As with EIS, investors will benefit from a capital gains tax exemption on any profit arising from the sale of shares after 3 years.
Capital Gains Tax Exemption
If shares are sold and the investor makes a loss, they may offset the loss against their capital gains tax. You must however have held the shares for a minimum of three years.
Inheritance Tax Exemption
With these schemes there is no inheritance tax to pay on shares held for two years.
If a loss is made after three years, an investor can offset that loss against their capital gains tax or income tax. This can be claimed in the tax year they realised the loss in or the following one. For example, say you invested £10,000 into an EIS qualifying company, and after three years that company loses all its value. Your at risk capital will be £10,000 minus whatever you have offset against your income tax. Lets say for all intents and purposes your actual at risk capital is £7,000. On a tax bracket of 45%, your loss relief will be effectively £7000 x 0.45 = £3,150. This means that in total your actual loss for the investment is £3,850 (£7,000 - £3,150).
The infographic below runs through three different scenarios of an investor on an income tax rate of 45%.
Now there are certain rules you must abide by to benefit from EIS and SEIS.
- You must not sell your shares for a minimum of 3 years.
- You must be a UK tax payer
- You can only invest up to a maximum on £1 million (EIS) or £100,000 (SEIS) in each tax year
- You cannot be ‘connected’ to the investee company through employment, directorship or partnership from the period of at least two years before your investment to three years after the investment.
- You cannot have a 30% or more shareholding in the company or any of its subsidiaries.
There is a possibility of ‘carry back’ for all or part of your EIS/SEIS investment to the previous tax year provided that the limit for relief is not exceeded for that year. This means that if you invest in an EIS qualifying company in the 2019/20 tax year, you could carry back the associated tax relief to the 2018/19 tax year (as long as your EIS/SEIS cap for 2018/19 is not exceeded).
EIS Advance Assurance
It is important to note there are many rules and considerations for what company qualifies for EIS. There no guarantee a company will be eligible for EIS, however companies can apply to HMRC for EIS ‘Advance Assurance’ which gives a provisional indication to whether a company might be able to apply for tax relief to its investors or not.
Applying for EIS/SEIS as a Company
For more information on how to apply for EIS/SEIS status please see this link.
Remember, when investing your capital is at risk
The EquitySpark Team