An Enterprise Investment Schemes (EIS) encourages investment in smaller, higher-risk trading companies. This can be particularly attractive to entrepreneurs who are looking to secure investments either in their own businesses or by applying their experience and expertise to other ventures.
A Seed Enterprise Investment Schemes (SEIS) is a derivative of EIS. Its aim is to attract seed investment in early stage companies. By their nature, these companies are generally higher-risk investments, so the tax reliefs for SEIS investment are more generous.
We are often asked about SEIS and EIS by both companies looking to apply for status and from investors attracted by the tax breaks. Be aware that rules mean that tax relief will only be given where there is a genuine risk to investors’ capital. Specifically excluded are companies and arrangements designed for capital preservation.
The investment must be shares in a qualifying company. This means an unquoted trading company with a permanent UK establishment carrying out a qualifying trade. There are certain restrictions to the size of the company depending on whether you are investing under SEIS or EIS.
EIS must have less than 250 full-time employees, less than £15 million in assets before the investment, and no more than £16 million afterwards. Knowledge-intensive companies can have up to 500 full-time employees. The company must be less than seven years old or 10 years old for knowledge-intensive companies. The company can raise a maximum of £5 million of capital from EIS investment each year, with a total maximum investment totalling £12 million.
SEIS is much smaller, at fewer than 25 employees and less than £350,000 gross assets. With SEIS the company must also be less than three years old. The company can raise a maximum of £250,000 capital from SEIS investment.
There are certain trades that are excluded, for example, money-lending, property development and, more recently, companies involved in energy generation. We advise seeking advance assurance from HMRC before an application for EIS status of shares issued is made to ensure investments will qualify.
EIS, it is possible to invest up to £1 million a tax year and obtain tax relief as below. This is doubled to £2 million a tax year as long as amounts over the initial £1 million limit are invested only in knowledge-intensive companies.
SEIS, the limit is £200,000 a tax year. Where the limit is not used for the previous year, this limit can be doubled, provided a claim to carry back some of the investment to the previous year is made.
On an investment under EIS, income tax relief is at 30% of the investment as a credit against your tax liability for the year in which the shares are issued (or the previous year if a claim is made). The income tax relief will be clawed back if the shares are disposed of within three years.
Under SEIS, the tax credit is 50% of the investment made. Again, the income tax relief will be clawed back if the shares are disposed of within three years.
Provided the shares are held for three years or more, in both cases any gain on the shares themselves is free from tax. An added benefit for both EIS and SEIS is the opportunity to defer or extinguish gains on other assets.
EIS - the tax on the gain is deferred until the shares are eventually sold.
SEIS - 50% of the amount invested can be used to extinguish a gain on an asset realised in the same tax year.
In either case the gain will come back into charge if the shares are sold within three years of issue.
There are restrictions to the relief where you are connected to the company you invest in. This is usually where you or your associates own more than 30% of the company or a paid director. However, often companies will look to secure ‘business angel’ investors.
A business angel will often be a successful entrepreneur who looks for opportunities to invest money into a business usually offering expertise to help the business grow. As part of this, the angel investor is often appointed as a director of the company, enabling them to be involved in the decision-making process and to better monitor their investment.
HMRC is prepared to accept that relief will still be available in these cases provided the level of remuneration paid is ‘reasonable’ in relation to their services to the company. Care does need to be taken with additional issues of shares.
If the company fails or the shares are sold at a loss, it is possible to claim the loss against your income for income tax purposes. The loss is adjusted for any income tax relief already claimed.
As these investments are in trading companies, the shares qualify as business property and are therefore free from inheritance tax once they have been held for two years. EIS/SEIS can therefore be a useful investment for estate planning.
Unusually, EIS and SEIS have sunset clauses (6 April 2025) and unless something happens before this date is reached, there will be no more EIS/SEIS. However, the legislation provides that sunset date may be extended by Treasury regulation and this our expectation.
As with all tax issues, circumstances will differ in each case. We have just covered a brief outline of the issues here. If you are looking to invest or to secure EIS or SEIS status for your business, our team can help.
We can help you set up your business choosing the right structures as well as advising on the tax reliefs available. For more information, get in touch with Simon Warne or your usual Crowe contact.