Your Essential Guide to SEIS and EIS.
The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are UK government initiatives designed to encourage investment in early-stage and growth-oriented businesses.
Both SEIS and EIS aim to stimulate investment in these businesses by providing tax incentives to investors, thus helping these businesses access much-needed funding.
Although they have the same goal, the two schemes differ in the companies they cover and the amount of tax relief they offer.
What is SEIS?
SEIS is a government-backed scheme that incentivises private independent investment into very early-stage companies, that might be deemed riskier, by providing tax breaks.
These start-ups tend to carry more risk than traditional investments like property and the stock market, but will go on to innovate, create jobs and grow the economy – all things the UK government is keen to promote. As a reward, the UK offers very appealing tax incentives to help lower the risk involved in start-up investing.
In fact, there’s a greater tax incentive for investors under the SEIS than EIS!
What are the key benefits for SEIS investors?
SEIS and Income Tax Relief:
Under SEIS, you get 50% back of the amount you invest as a reduction in your Income Tax bill.
For example, say you invested £10,000 in an SEIS-eligible company. When you file your tax return, list the details of your SEIS-qualifying investment to reduce your Income Tax bill by £5,000.
You can invest up to £200,000 per year across SEIS businesses. (In April 2023, this limit increased from 100k).
Capital Gains Disposal Relief:
When you come to sell your shares, usually you’d pay Capital Gains Tax on the profit you make. With SEIS, you get to keep it all, paying 0% CGT tax no matter how small or large the eventual exit.
Remember, there will be restrictions when you come to sell your SEIS shares – such as a minimum holding period of 3 years.
Capital Gains Reinvestment Relief:
You can offset 50% of Capital Gains Tax charges when you reinvest taxable profit made to a non SEIS-eligible company into an SEIS-eligible company.
Loss Relief:
In the unpredictable world of start-ups, not every venture succeeds. However, SEIS provides a safety net! If you haven’t made a profit when you come to sell your shares, you can set that loss against your Income Tax bill.
The amount you can claim as loss relief is your at-risk investment (the amount of money you lost minus the amount you’ve already received in Income Tax relief) multiplied by your Income Tax rate (20%, 40% or 45%).
Inheritance Tax relief:
SEIS shares aren’t subject to Inheritance Tax, so long as they have been held for 2 years.
When can you claim SEIS tax relief?
You can claim SEIS tax relief up to five years from the 31st January following the tax year in which you made the investment. It’s the 31st January because that’s the deadline for self-assessment tax returns.
If you don’t use all of your SEIS allowance (£200,000 per year), you can’t carry forward the SEIS limit to the next year. But you can carry back SEIS tax relief to the previous year, if you haven’t already invested the maximum allowed under the scheme in that year.
What companies can you invest in under SEIS?
To meet SEIS status, companies must:
- Have been trading for less than 3 years
- Employ fewer than 25 people
- Have no more than £350,000 in gross assets
- Have a permanent establishment in the UK
- Not carry out an excluded trade (e.g. banking, insurance or property development)
You can raise up to 250k (up from 150k last year).
How is EIS different?
EIS covers a broader range of companies, including those at later stages of growth. It is not restricted to seed-stage businesses, designed for medium-sized start-ups.
To meet EIS status, companies must:
- Have been trading for less than seven years
- Employ fewer than 250 employees
- Have no more than £15 million in gross assets
- Have a permanent establishment in the UK
- Not carry out excluded trade (e.g. banking, insurance or property development)
Under EIS, you get 30% back of the amount you invest as a reduction in your Income Tax bill and you can invest up to £1 million per year across SEIS businesses.
As with SEIS, the Capital Gains Tax, the Inheritance Tax Relief and the Loss Relief are all the same!
How much money can I raise under these schemes?
Total investment amounts can be no more than £250,000 for SEIS funding and no more than £12 million for EIS funding.
Can you raise SEIS and EIS Funding at the same time?
Yes, you can raise both SEIS and EIS funding at the same time, but there is a right order to do so. You cannot raise EIS funding and then go back to claiming seed company funds, so in many cases, companies choose to raise SEIS funding initially, and once they have utilised the SEIS allowance, they then move on to raising EIS funding.
You can offer investors EIS shares after you’ve reached the SEIS limit of £250,000, if you time it right! Just keep in mind that HMRC rules state that you can’t raise investments under these scheme on the same day. You’ll need to issue SEIS shares before you take EIS funding.
What can I use SEIS and EIS funding for?
The funds must be used on qualifying business activity, promoting the growth of the company, such as hiring new employees or marketing activities.
There’s also a limit on how long you can take to spend your funds. For SEIS, they must be spent within 3 years, and for EIS, it is 2 years.
What is SEIS and EIS Advance Assurance?
The SEIS and EIS Advance Assurance is approval from the HMRC that an investment in that company is likely to qualify for tax relief. This approval is designed to give assurance to investors that their proposed share issues are likely to qualify, helping the company to appear more investable.
It isn’t a 100% guarantee that their investment will qualify for SEIS and EIS tax relief, but it shows that if nothing changes, it is likely that they can get these tax breaks.
How do I apply for Advance Assurance?
You can apply online at the gov.uk website, but first make sure that your company meets the eligibility criteria for SEIS or EIS.
You’ll then need to demonstrate that you fulfil the criteria.
For SEIS, this includes:
- Trading start date
- Previous SEIS investments
- Your response to the risk to capital condition
- Details of one potential investor
Also, make sure to provide these supporting documents:
- Bank statements / accounts
- Articles of Association
- Pitch deck
- Financial forecast
- Share Register
- Documents confirming any de minimis aid
Has this been helpful? Contact us to learn more about how you can grow your business with the help of the SEIS and EIS schemes.
