SEIS & EIS Schemes
The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are UK government initiatives that offer tax incentives to investors who back UK businesses. SEIS is designed for very young companies, providing higher tax relief to encourage investment, while EIS supports established growing businesses. These schemes help UK companies attract funding by reducing investment risks for individuals and SEIS and EIS funds.
Main Features of the Schemes
What is the Seed Enterprise Investment Scheme (SEIS)?
The Seed Enterprise Investment Scheme (SEIS) is a UK government-backed initiative designed to encourage investment in very early-stage businesses. Investors can claim up to 50% income tax relief on investments of up to £200,000 in qualifying companies each tax year.
SEIS is aimed at businesses that are less than three years old, have fewer than 25 employees, and have assets of no more than £350,000. It allows companies to raise up to £250,000 in total investment through the scheme.
What is the Enterprise Investment Scheme (EIS)?
The Enterprise Investment Scheme (EIS) helps UK businesses raise growth capital by offering tax relief to investors. EIS is designed for more established businesses, offering 30% income tax relief on investments up to £1 million per investor, per year, with a £2 million limit if the business is “knowledge-intensive.”
EIS companies can raise up to £10m or £20m if knowledge-intensive companies.
EIS companies must have fewer than 250 employees and gross assets under £30 million. Investors can also defer capital gains tax and receive tax-free gains if they hold the shares for at least three years.
EIS companies should not have been trading for more than 7 years prior to raising its first EIS finance or 10 years for a knowledge-intensive business.
What are the tax benefits of SEIS and EIS for investors?
Both SEIS and EIS provide significant tax advantages:
- SEIS:
- 50% income tax relief on investments up to £200,000 per tax year.
- Exemption from capital gains tax (CGT) on profits from SEIS shares if held for three years.
- Loss relief if the investment doesn’t perform.
- Reinvestment relief: 50% of capital gains reinvested through SEIS are exempt from CGT.
- EIS:
- 30% income tax relief on investments up to £1 million, or £2 million for knowledge-intensive businesses.
- CGT deferral on other gains if invested in EIS.
- Tax-free gains on EIS shares if held for at least three years.
- Loss relief if the business fails.
What types of businesses qualify for SEIS and EIS?
To qualify for SEIS or EIS, businesses must meet specific criteria:
- SEIS:
- Must be less than two years old.
- Fewer than 25 employees.
- Gross assets of £350,000 or less.
- Must not have previously raised funds under EIS or VCT.
- Companies can raise up to £250,000.
- EIS:
- Fewer than 250 employees (500 for knowledge-intensive companies).
- Gross assets not exceeding £30 million before investment.
- Must be carrying out a qualifying trade (not in excluded sectors like finance or property development).
- Companies can raise up to £10 million in a 12-month period under EIS, or £20 million for knowledge-intensive companies, up to a lifetime limit of £24m (or £40m for knowledge intensive).
What is Advanced Assurance?
Asking HMRC if they agree that an investment would meet the conditions of a venture capital scheme is called advance assurance.
Snowball has advised on over 100 of these schemes and can produce the package that needs to go to HMRC for an Advanced Assurance Certificate, whereby HMRC confirm your proposals and eligibility and this is virtually a prerequisite to obtaining SEIS or EIS investment.
Advantages & Disadvantages
There are a number of considerations to be borne in mind before choosing to go forward with a SEIS or EIS scheme, both positive and negative, and whether it is the right fit, or product for you.
Advantages
- Attracting investors: The generous tax reliefs make these schemes highly appealing to investors, particularly for high-risk, early-stage companies.
- Encouraging innovation: SEIS and EIS are designed to support growth and innovation in the UK economy, helping companies develop new products and services.
- Tax-efficient exits: Investors can benefit from capital gains tax-free profits if they hold the shares for at least three years.
Disadvantages
- Complexity: The application process for SEIS and EIS approval can be complex, requiring businesses to meet strict qualification criteria.
- Limited to certain sectors: Some industries, such as financial services, property development, and energy generation, are excluded from SEIS and EIS funding.
- High-risk investments: Both schemes target early-stage businesses, which carry a higher risk of failure compared to established companies.
FAQ’s
What is the main difference between SEIS and EIS?
The main difference lies in the size and maturity of the businesses they support:
- SEIS is aimed at very young, early-stage companies that are less than two years old, with fewer employees and lower asset limits. It offers 50% income tax relief on investments.
- EIS targets more established businesses up to 7 years old (10 years for knowledge intensive) with up to 250 employees, offering 30% income tax relief. EIS is suitable for companies looking to scale up.
Can businesses use both SEIS and EIS?
Yes, businesses can use both schemes, but they must start with SEIS and raise up to £250,000 before transitioning to EIS. Once a company has raised funding through SEIS, it can then apply for further investment under EIS, but it cannot issue SEIS shares after it has used EIS.
What happens if my SEIS/EIS investment fails?
If the company you invest in under SEIS or EIS fails, you can claim loss relief. The loss can be offset against your income or capital gains, reducing your overall tax liability.
For SEIS, the effective loss relief can amount to up to 86.5%, depending on the investor’s tax bracket. For EIS, it’s up to 61.5%.
How long do investors need to hold SEIS and EIS shares?
For both SEIS and EIS, investors must hold their shares for a minimum of three years to benefit from the tax reliefs. Selling shares before the three-year period could lead to the loss of income tax relief and capital gains tax benefits.
What sectors are excluded from SEIS and EIS?
Certain sectors do not qualify for SEIS or EIS, including:
- Financial services (banking, insurance, etc.).
- Property development or management.
- Coal or steel production.
- Energy generation.
- Farming and agriculture.
Businesses in these sectors cannot raise funds through SEIS or EIS, as the schemes are designed to support innovation and growth in other parts of the economy.
Next Steps
Given the complexity of the SEIS and EIS schemes it is essential to seek professional advice before embarking on this course. Snowball’s has a unique position having undertaken many successful applications on behalf of clients to obtain Advanced Assurance status for SEIS and EIS.
Snowball will oversee the process, to take ownership of the relationship between investor, applicant, and HMRC and other professionals involved ensuring a smooth journey to completion.
For an initial no obligation call or meeting, please contact us to arrange.