EIS and SEIS

The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are government initiatives designed to encourage and support private investment into SMEs, by offering some of the most attractive tax reliefs available in the UK.

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Income tax relief

Investors can reduce their income tax liabilities by up to 30% for EIS and 50% for SEIS of the value of their investment into the EIS/SEIS qualifying company.

Defer/reduce CGT

Investors can defer part or all of their CGT liability on disposal of assets by making EIS/SEIS investments and can receive an exemption from CGT of up to 50% of their investment, up to certain statutory limits.

Tax free disposals

When the investment is eventually sold, investors are exempt from CGT provided the shares have been held for three years enabling them to ‘cash in’ on their gains free of tax.

EIS example

Company X is a new trading company looking to generate £300,000 to develop, manufacture and retail its new autonomous lawnmower. As the company has no proven track record, it is finding it difficult to persuade investors to finance its idea.

Jane is a highly paid international IT consultant who has an Income Tax liability of £150k. She recently sold an investment property realising a capital gain of £200,000 with a potential Capital Gains Tax liability of £56,000.

Assuming Company X meets all the relevant criteria for EIS, should Jane invest the full £300,000 in Company X:

• Income Tax relief of £90,000 would be available reducing her Income Tax liability for the year to £60,000

• The Capital Gains Tax liability of £56,000 would be mitigated until a future date allowing her to utilise the funds to say, invest in other commercial ventures.

The company was very successful and after three years Jane’s original investment is now valued at over £1m. The founders offer to purchase Jane’s shares at their market value. As such, Jane has realised a gain on her investment of £700k which is tax free.

Alternatively, Jane may opt to retain the shares and continue to hold a right to dividends as opposed to realising capital value.

More about EIS and SEIS

For many start up businesses, raising finance to start new trading activities is vital. Attracting investors to invest in what may be a risky venture can be challenging and that is why reliefs such as the EIS and SEIS can be extremely valuable. EIS was established in 1993 and SEIS was introduced in 2012 in order to incentivise smaller start-up businesses who wish to raise funds of up to £150,000.

Like many valuable reliefs, there are conditions which have to be met in order to secure the necessary tax reliefs. The tax rules are complicated, detailed, and as can be anticipated, strictly interpreted and enforced by HMRC.

Here at ETC Tax, we are well versed in helping clients navigate through these rules. We can assist potentially eligible companies in obtaining the necessary assurances that any investment received may qualify for EIS/SEIS and continually ensure that this is case. Furthermore, we can also structure investments so that individuals may maximise their individual reliefs.

It is worth highlighting some of the common potential pitfalls which, with some careful consideration at the outset, can be avoided, ensuring that relief is not lost.

An investor should not be connected with the company two years before and three years after the issue of the shares.
The shares must be fully paid up at the time they are issued and be subscribed for wholly for cash with no preferential rights.
The money raised must be used, within given timescales, for the purposes of the qualifying business activity.
The trade must be a qualifying trade conducted on a commercial basis with a view to profit. It must not involve to a substantial extent the carrying on of excluded activities, as set out in the legislation.

Some of our specialists who can help

Simon Denye

Associate Director

Simon is one of ETC’s Associate Directors. He has been a tax adviser for 23 years and is a fellow of the ICAEW. Simon works across all areas of tax advisory,...

Zeeshan Khilji

Senior Manager, Head of ETC Tax – Midlands

Zeeshan has a particular specialism in advising owner managed businesses and their stakeholders at all stages of the business life cycle, and regularly advis...

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