EIS & SEIS Summary

EIS & SEIS SUMMARY

Background

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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.

The EIS and SEIS have been successful initiatives over the years and have delivered more than £30bn in funding since the launch of EIS in 1994, helping approximately 53,000 businesses to take root and in some cases flourish. 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 certainly not a "loophole" and 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 and indeed, successive governments have continued to support them over the years. Indeed, unlike some tax planning strategies, there are 3 true winners with EIS & SEIS:

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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.

The Government reaffirmed its support for EIS in the Autumn Statement delivered by the Chancellor on 22^nd November 2023. The announcement confirmed that EIS will continue to operate until 2035, extending the original deadline of 2025. This followed the enactment of the Finance Bill (No.2) in July 2023, which introduced valuable enhancements to SEIS.

FURTHER DETAILS ON EIS & SEIS IS AVAILABLE IN OUR EIS GUIDE THAT IS AVAILABLE TO INDIVIDUALS THAT REGISTER ON OUR SITE.

CLICK HERE TO SEE A SHORT VIDEO CLIP OF THE CHANCELLOR RISHI SUNAK EXTOLLING THE VIRTUES OF SEIS AND EIS.

CLICK HERE TO SEE A SHORT CLIP OF CHANCELLOR KWARTENG, IN HIS MINI-BUDGET ON 23 SEPTEMBER 2022, CONTINUING TO SUPPORT EIS AND SEIS, BY EXTENDING EIS BEYOND THE 2025 SUNSET CLAUSE AND IMPROVING SEIS LIMITS.

A QUICK SUMMARY OF THE TAX RELIEFS

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.

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Please note that in his Mini-Budget on 23 September 2022, the Chancellor announced various improvements to the SEIS scheme from April 2023, including an increase to the annual investor limit from £100,000 to £200,000.

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.
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 £200,000.
“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.
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 £200,000 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.