Both SEIS and EIS are HMRC-run schemes offering tax relief to investors of early stages or higher-risk companies. These tax reliefs are designed to encourage potential investors to consider less established companies. Whenever you invest in a company there is risk associated with your investment, but with these schemes some of that risk is removed. Below we’ve covered everything you need to know about SEIS and EIS investments.
SEIS stands for the Seed Enterprise Investment Scheme, the HMRC-run scheme supports small, early-stage companies to raise funds by encouraging individual investors with tax reliefs on investments. For an investor, the tax breaks associated with a SEIS qualifying company greatly reduce the risk of investment. The SEIS allows you to claim relief on up to £100,000 invested through the scheme per annum. If you’re looking to invest more than £100,000 in a young business, you may prefer to look into the EIS scheme.
SEIS Tax Relief
For those who invest in SEIS eligible companies, the scheme offers a number of tax reliefs for investors. These range from automatic Productions to loss relief. Some of these are dependent on your tax bracket, so you’ll need to be aware of what your tax bracket is.
With SEIS you could be eligible for:
- Individual Income Tax relief of 50% of the amount invested
- Exemption from Capital Gains on earnings from shares
- Profits realised within three years are exempt from Capital Gains if reinvested in the SEIS
- Loss relief if the company fails (even if this is within the three-year hold period)
In order to be eligible for the tax breaks, you must hold the shares for at least 3 years. There are some complex rules around which companies qualify as an SEIS investment. Unfortunately, there’s no way to guarantee that an investment will be eligible for the the SEIS. However, companies can apply to HMRC for SEIS ‘advance assurance,’ giving a provisional indication of whether or not a company may be eligible to apply for tax relief for its investors.
‘EIS‘ stands for Enterprise Investment Scheme, is a scheme run by HMRC scheme which supports younger, higher-risk businesses by offering investors generous tax reliefs. In this way, EIS encourages investors in early-stage businesses, or startups.
There are few ways in which the investors of an EIS eligible company can benefit.
- EIS Income Tax Relief: When you invest in an EIS eligible company you can claim back up to 30% of the value of your investment in the form of income tax relief.
- EIS Capital Gains Tax Relief: If you have held shares for 3 years or more and decide to sell them whatever money you make could be exempt from Capital Gains tax. for example, if you buy shares at £5,000 and then sell 3 years later for £20,000, or you will not have to pay capital gains tax on the £15,000 gain.
- EIS Loss Relief: If the business that you have invested in performs poorly and you lose money on your investment, you may claim loss relief. Whatever your highest rate of income tax is, that is how much loss relief you can claim. So for example, if your rate of income tax is 30% you can claim 30% of your net loss in income tax relief.
- EIS Inheritance Tax Relief: Generally, you can claim Inheritance tax relief of 100% after two years of holding the EIS shares. This relief is not available if the shares are listed on a recognised stock exchange.
What are the Rules for an EIS Investors?
When you invest in an EIS company, there are certain rules you have to follow to be entitled to the tax benefits. In order to receive these benefits, an investor must follow these rules:
- You must buy new shares that are not already on market
- You must not be connected to the EIS company i.e. an employee, a partner or a paid director
- You must be a UK taxpayer
- You must have the shares for at least 3 years (if you sell or give the shares you will be subject to relief clawback)
- You must not invest more than £1 million in any number of qualifying companies in each tax year.
- You can not carry-forward your EIS tax relief.
Disclaimer: Tax relief can be complex and will depend on an individual’s circumstances. The information sited here may change in the future.