EIS & SEIS SUMMARY

Background

The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) are long established government schemes that aim to encourage investment into early stage smaller UK companies, that show high promise and growth potential.  

In general, the EIS has been a succesful initative over the years and has delivered over £20bn in funding since its launch in 1994, helping over 29,000 businesses to take root and in some cases flourish. Additionally, SEIS has helped around 12,000 businesses with over £1bn in funding. By helping early-stage and often pre-profit companies, the model has played a vital role in maintaining the UK’s efforts to produce innovative and in some cases world class businesses.

In order to encourage investment into EIS and SEIS, investors are granted a variety of generous tax reliefs by the UK government. The intention of these tax reliefs is to mitigate the investment risks and enhance the returns that can be generated from investing in growing UK companies.

As the tax reliefs provided to investors are very generous, at a time when the government are closing many tax “loopholes”, it is important to note that EIS and SEIS are not considered aggressive tax planning strategies. This is because the tax benefits are provided under current legislation, in order to encourage investment in British business. Indeed, unlike some tax planning strategies, there are 3 true winners with EIS & SEIS:

1.      The Investor – Benefits from an investment in a small, promising UK business and receives valuable tax reliefs.

2.      The Company – Receives investment capital at a time when it can be difficult for small businesses to borrow from traditional lenders.

3.      The Country – Helps the economy and creates potential tax revenues and employment.

A QUICK SUMMARY OF THE TAX RELIEFS

EIS

30% Initial Income Tax Relief
Effective net cash outlay of 70p in the £
CGT Freedom
No Capital Gains Tax to pay on any EIS gains after 3 years
CGT Deferral Relief
Potential unlimited indefinite deferral of an existing CGT bill
Loss Relief
Maximum exposure of 38.5p in the £ for a 45% Income Tax payer
Business Relief
Potential Inheritance tax saving of 40p in the £ after 2 years

SEIS

50% Initial Income Tax Relief
Effective net cash outlay of 50p in the £
CGT Freedom
No Capital Gains Tax to pay on any SEIS gains after 3 years
CGT Reinvestment Relief
Potential exemption of an existing CGT bill on 50% of the gain, to the extent reinvested
Loss Relief
Maximum exposure of 27.5p in the £ for a 45% Income Tax payer (or 13.5% if CGT Reinvestment Relief claimed)
Business Relief
Potential Inheritance tax saving of 40p in the £ after 2 years
EIS TAX SUMMARY - A Bit more Detail

The tax reliefs available to investors in companies qualifying under the EIS are summarised below:

EIS

1. Income Tax Relief

  • An individual can reduce their Income Tax liability by up to 30% of the amount invested in qualifying EIS shares.
  • A qualifying investment must be held for no less than 3 years from the date of issue, or for 3 years from commencement of trade if later, to avoid Income Tax relief being withdrawn.
  • There is no minimum subscription per company and the maximum investment in respect of which an investor may obtain Income Tax relief in any tax year is £1m. The maximum is £2m for Knowledge Intensive Companies.
  • “Carry Back” - Individuals may elect for their subscription for shares (up to their maximum annual allowance) to be treated as if made in the previous tax year thereby effectively carrying Income Tax relief back 1 year. This means that, up to £2m can be invested of which £1m can be applied to the previous tax year.
  • Income Tax relief is limited to the amount which reduces the individual’s Income Tax liability for the year to ‘nil’.

2. CGT Freedom

  • No Capital Gains Tax is payable on the disposal of shares after 3 years, or 3 years after commencement of trade, if later, provided the initial Income Tax relief was given and not withdrawn on those shares. The shares can be held for much longer, thus providing the potential for any CGT free gain to accrue over a longer period.

3. CGT Deferral Relief

  • By investing in an EIS, where an investor disposes of an asset that gives rise to a capital gain, the capital gains realised can be deferred for as long as the EIS qualifying shares are held. The disposal of the asset that generated the gain being deferred, must have happened less than 36 months before the date of the issue of shares in the EIS investment or, less than 12 months after the issue of EIS shares.
  • Deferral relief is unlimited, in other words, this relief is not limited to investments of £1m per annum and can also be claimed by investors whose interest in the company exceeds 30%.

4. Loss Relief

  • If EIS shares are disposed of at any time at a loss (after taking into account Income Tax relief), such loss can be set against the investor’s capital gains, or income in the year of disposal or the previous year.
  • For losses offset against income, the net effect is to limit the investment exposure to 38.5p in the £1 for a 45% tax payer, if the shares were to become totally worthless.
  • Alternatively, the losses can be carried forward and offset against future capital gains at the prevailing rate.

5. Business Relief – Inheritance Tax ‘IHT’

  • Shares in qualifying companies will generally qualify for Business Relief for Inheritance Tax purposes at rates of up to 100% after 2 years of holding the investment. This means any liability for Inheritance Tax is reduced or eliminated in respect of the value of such shares.
SEIS TAX SUMMARY - A Bit more Detail

The tax reliefs available to investors in companies qualifying under the SEIS are summarised below:

SEIS

1. Income Tax Relief  

  • An individual can reduce their Income Tax liability by up to 50% of the amount invested in qualifying SEIS shares.
  • A qualifying investment must be held for no less than 3 years from the date of issue, to avoid Income Tax relief being withdrawn.
  • There is no minimum subscription per company and the maximum investment in respect of which an investor may obtain Income Tax relief in any tax year is £100,000.
  • “Carry Back” - Individuals may elect for their subscription for shares (up to their maximum annual allowance) to be treated as if made in the previous tax year, thereby effectively carrying Income Tax relief back 1 year. This means that with up to £200,000 can be invested, of which £100,000 can be applied to the previous tax year.
  • Income Tax relief is limited to the amount which reduces the individual’s Income Tax liability for the year to ‘nil’.

2. CGT Freedom

  • No Capital Gains Tax is payable on the disposal of shares after 3 years, or 3 years after commencement of trade, if later, provided the initial Income Tax relief was given and not withdrawn on those shares. The shares can be held for much longer, thus providing the potential for any CGT free gain to accrue over a longer period.

3. CGT Reinvestment Relief

  • By investing in an SEIS, where an investor disposes of an asset that gives rise to a capital gain, Reinvestment Relief of 50% of the gain reinvested is available. Eligibility for this relief follows that of the Income Tax relief. The disposal of the asset that generated the gain being deferred, must be in the same year as the Income Tax Relief claim.
  • Reinvestment relief is limited, to £100,000 in a tax year.  

4. Loss Relief

  • If shares are disposed of at any time at a loss (after taking into account Income Tax relief), such loss can be set against the investor’s capital gains, or income in the year of disposal or the previous year.
  • For losses offset against income, the net effect is to limit the investment exposure to 27.5p in the £1 for a 45% tax payer, if the shares were to become totally worthless. This can be reduced by up to a further 14p in the £1 if CGT Reinvestment Relief is claimed, limiting the investment exposure to 13.5p in the £1.
  • Alternatively, the losses can be carried forward and offset against future capital gains at the prevailing rate.

5. Business Relief – Inheritance Tax ‘IHT’

  • Shares in qualifying companies will generally qualify for Business Relief for Inheritance Tax purposes at rates of up to 100% after 2 years of holding the investment. This means any liability for Inheritance Tax is reduced or eliminated in respect of such shares.
IMPORTANTLY THE ABOVE INFORMATION IS MEANT TO BE A SIMPLE SUMMARY. THIS INFORMATION SHOULD NOT BE RELIED UPON WHEN INVESTING. THERE ARE A NUMBER OF CRITERIA THAT INVESTORS AND COMPANIES NEED TO MEET, IN ORDER TO QUALIFY FOR TAX RELIEFS. PROFESSIONAL ADVICE SHOULD BE TAKEN.
CONTACT DETAILS

EIS.Marketing Ltd
4 The Willows
Mill Farm Courtyard
Beachampton
Milton Keynes
MK19 6DS

tel: +44 (0) 1908 566800
email: info@eis.marketing
Kickstart Capital is a trading name of EIS.Marketing Ltd.
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