EIS and SEIS: breaking through the jargon
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This is a guest post from Current Capital, an alternative funding platform through which individuals can invest in high-growth UK companies. Current Capital provides advisory and planning service to its portfolio companies alongside investment, and carries out due diligence on behalf of investors.
In brief
As a non-business owner, it’s likely you receive your hard-earned wage via the PAYE system – which means your tax is deducted automatically and sent to HMRC without you ever seeing it. It’s therefore unsurprising that many of us don’t give much thought to the ways in which we can reduce our annual tax bill. The EIS and SEIS schemes outlined below allow you to catch a welcome tax break while supporting high-growth UK companies at the same time.
As part of the UK government’s ongoing initiative to support SMEs, the Enterprise Investment Scheme (EIS)and Seed Enterprise Investment Scheme (SEIS) are each designed to make investment in UK-based businesses an increasingly appealing prospect for potential investors. Recognising the difficulties often faced by early-stage companies when it comes to raising the finance needed for growth, these schemes offer generous tax relief to investors who are willing to put their faith and money into these ambitious enterprises.
Introduced in 1994, the EIS was the first of the two to be launched – with SEIS emerging as a complementary scheme in 2012. The core difference between the two schemes is that businesses that qualify for SEIS are almost always smaller than those that qualify for EIS – with the qualifying criteria for the former including a lower maximum number of employees (25 for SEIS vs. 250 for EIS) and lower gross assets, amongst other distinguishing factors.
EIS
The big brother of the SEIS, the EIS is designed with small and medium-sized businesses in mind, and comes with Income Tax relief of 30% against the amount invested – up to the maximum annual investment of £1,000,000 per tax year. For example, an investment of £25,000 would mean tax relief of £7,500. Other key benefits associated with EIS include:
- You’ll be exempt from Capital Gains Tax (CGT) on any profit from the sale of your shares, after you’ve held them for an initial period of 3 years
- You can defer up to 100% of your investment amount against any CGT you incurred up to 1 year before or 3 years after disposal
- Shares are generally inheritance tax (IHT) free, as long as the shares are held for an initial period of more than 2 years
- If the shares are sold at a loss, you can offset this against CGT or Income Tax
Naturally, there are a number of rules and regulations surrounding this type of investment scheme, so it’s always worth consulting a finance or tax professional to decide whether this type of investment is suitable for you.
SEIS
Unlike the EIS, the SEIS is focused on very early-stage companies and offers significantly greater Income Tax relief of 50% against the amount invested. Though the maximum annual investment is smaller (at £100,000 per tax year), when investing in SEIS-eligible businesses, you can expect exciting tax relief benefits including the following:
- You’ll be exempt from Capital Gains Tax (CGT) on any profit from the sale of your shares, after you’ve held them for an initial period of 3 years
- CGT write-off of 50% of the investment amount in the same tax year
- Shares are generally inheritance tax (IHT) free, as long as the shares are held for an initial period of over 2 years
- If shares are sold at a loss, you can offset this against CGT or Income Tax
Investors should take into consideration that their equity stake in a single business can be no higher than 30% in order to qualify for EIS or SEIS tax relief. For investors who are looking to invest above the £100,000 SEIS threshold, a split investment across multiple businesses eligible for SEIS and/or EIS tax reliefs might be the most suitable option in terms of enjoying the best return on your investment.
For UK investors ready to part with their money in exchange for a stake in an eligible company, the EIS and SEIS schemes offer a chance to support some of our most promising enterprises by providing the crucial cash injection these businesses need to grow and develop. And, although these tax reliefs offer a welcome benefit for investors, investing in a UK-based business also means you can be a part of the next generation of UK SMEs. Whether that’s the next big breakthrough in the rapidly evolving tech sector or a solid stake in real estate, investing in high-growth companies has never been a more appealing prospect.
To read more about Current Capital, click here.