A Brief Guide To EIS and SEIS Investments
The Enterprise Investment Scheme (EIS) provides relief for investors in qualifying companies, and additional relief is potentially available for investors under the Seed Enterprise Investment Scheme (SEIS) in companies that are in the earliest stages of development.
The investment must be for shares that have been fully paid up, in cash, when they are issued, and these must be full-risk ordinary shares, not redeemable with no preferential rights other than certain fixed preferential dividend rights. There are several possible benefits to investing under the EIS and SEIS:
Income Tax Relief
EIS income tax relief is claimed at 30% of the amount invested in the tax year in which the investment is made, up to £1,000,000 of investment (i.e. £300,000 of income tax relief per year).
Individuals can also claim SEIS Income Tax relief at 50% of the amount invested in the tax year in which the investment is made, up to £100,000 of investment (i.e. a maximum of £50,000 of income tax relief per year).
These reliefs can be carried back to the tax year preceding the year of investment, subject to the annual limit. The relief is given as a reduction of the investor’s income tax liability, meaning that if the relief available exceeds the investor’s income tax liability for the year in question, the relief is wasted.
The shares must be held for a certain period or Income Tax relief will be withdrawn. Generally, this is three years from the date the shares were issued. The relief is not normally available if the investor (or an associate) is connected with the company, either by financial interest in the company, or by employment.
Capital Gains Tax Exemption
If the investor has received Income Tax relief (which has not subsequently been withdrawn) on the cost of the shares, and the shares are disposed of after they have been held for the required period, any gain is free from Capital Gains Tax.
Capital losses in excess of any Income Tax relief received can be set off against income in the year of disposal, rather than only being set off against capital gains.
This exemption is not available if the investor (or an associate) is connected with the company. It may also be reduced if the investor has had Income Tax relief withdrawn due to value received (see below).
Capital Gains Tax Deferral Relief for EIS shares
Individual investors (and trustees of certain trusts) may defer the payment of tax on a capital gain where the gain is invested in shares of an EIS qualifying company. The investment must be made within the period one year before or three years after the gain arose.
Withdrawal/Reduction of SEIS Reliefs
The reliefs outlined above will be withdrawn or reduced if the shares to which relief is attributable are sold before the end of the relevant period. The grant of certain options over the shares will be deemed to be a disposal. Disposals to a spouse will not result in the withdrawal of relief.
Relief is also withdrawn or reduced where the investor (or their associate) receives any value (over £1,000) from the issuing company at any time in the relevant period after the shares are issued, such as the company repaying any debt owed to the individual or making a loan or advance to the individual.
The company being invested in benefits from the increased likelihood of investment due to the availability of the reliefs listed above, however it must also meet the following criteria otherwise any tax relief will not be available:
Criteria for Both EIS & SEIS
- The company must trade through a UK permanent establishment.
- Trading: Either the company or at least one of its qualifying subsidiaries must exist for the purpose of carrying on a qualifying trade which involves a qualifying business activity.
- Unquoted status At the time when the shares are issued, neither they nor any of the company’s other shares or debentures or other securities may be quoted.
- Control and independence: Any subsidiaries controlled during the qualifying period must be qualifying subsidiaries. The issuing company must not itself be a subsidiary.
- Time Limit for using the funds: The money raised by the share issue must also be employed for the purposes of the trade within three years of the shares being issued for SEIS and 2 years for EIS investment.
Additional Criteria for EIS
- Gross assets: Less than £15m immediately before the issue of the shares, and £16m immediately after the issue and fewer than 250 full-time employees.
- Property managing subsidiaries: if the company has a property managing subsidiary, that subsidiary must be a qualifying 90% subsidiary of the company.
- Financial health: The company must not be ‘in difficulty’ at the date the shares are issued.
- Investment Limit: Companies are not allowed to raise more than £5 million in total in any 12 month period from the venture capital schemes.
Additional Criteria for SEIS
- The trade must be less than 2 years old at the time of issue and the company must not have carried on any other trade prior to this.
- Gross assets: The company must have gross assets of less than £200,000 at the time of the share issue and fewer than 25 full-time employees.
- The company must not have had any investment from a Venture Capital Trust (VCT), or issued any shares in respect of which it has submitted an EIS compliance statement.
- Investment Limit: Companies are not allowed to raise more than £150,000 under SEIS.
Claiming SEIS/EIS Relief
Before investors can claim any tax relief, the company must complete form SEIS1 or EIS1 and send it to the Small Companies Enterprise Centre (SCEC) once it has been trading for at least four months or it has spent at least 70 per cent of the monies raised by the relevant issue of shares.
Once qualification is confirmed by the SCEC, certificates conferring tax relief can be issued to investors. This process must be completed for each share issue.
For professional advice about EIS or SEIS please contact us on 01962 856 990 or firstname.lastname@example.org.
We offer a free initial consultation so should you wish to talk to us please call us on 01962 856 990 or visit our contact page.