What do EIS and SEIS mean? 

Private investments are the fuel that keeps the innovation engine running in a market economy. The UK Government understood that and created Tax Relief Schemes aimed to encourage investors to become part of the innovation process by diminishing the financial risks.

The Seed Enterprise Investment Scheme (SEIS) offers tax deductions to investors who choose to invest in small companies, with assets not worth more than £200,000. For larger companies, the Enterprise Investment Scheme (EIS) is available and offers similar benefits, as explained in this article.

The Seed Enterprise Investment Scheme (SEIS)

This tax relief scheme is one of the world’s most efficient schemes. Investors can claim a sum of up to 50% of the value of their investment to be deducted from the income tax, without being required to invest a lot of capital.

The SEIS tax relief scheme is extremely important for small businesses and early-stage startups. Investors are less reluctant to invest their money in an innovative idea, as they can get half of their investment back from the Government.

Conditions for Investors

• - Regardless of the number of companies you invest in, you cannot get a tax deduction bigger than £50,000 (£ 100,000 investment) for each tax year.
• - You cannot be associated with the company that you invest in as an employee, manager, founder etc.
• - The shares you obtain through investment must be in your possession for at least 3 years.
• - You cannot own more than 30% of the company you invest in.
• - The shares you invest in must be issued no earlier than the 6^th of April 2012.
• - You must be a UK taxpayer.
• - You cannot carry forward the tax relief.

Conditions for Entrepreneurs

- The company you invest in must be a seed-stage, recently incorporated business.

- The company must not have more than 25 employees and gross assets must not account for more than £200,000.  

What Tax Reliefs are available

Income Tax Relief

The conditions and rules for income tax relief are straight-forward. If the value of your investments in a tax year is no bigger than £100,000, you can get a deduction of £50,000. If the value of your investments is less than that, you’ll get a deduction of 50% of your investments.

Capital Gains Tax Relief

• - Disposal Relief: If you hold the assets you acquired through investments for at least three years and sell them for greater value than the one you paid for initially, you’ll be exempt from the Capital Gains Tax.
• - Deferral Relief: If you sell any assets in your possession in order to acquire shares in a company which qualifies for the SEIS scheme, you are not required to pay the Capital Gains Tax until a later date (usually when you get rid of the SEIS shares).

Capital Gains Tax Reinvestment Relief

If you made a previous investment of any kind which brought you financial gains and then you decide to reinvest them in a company which qualifies for the SEIS scheme, you will be exempt from 50% of the Capital Gains Tax.

Loss relief

This kind of relief is applicable if the investment you made does not prove profitable or the business fails. This relief also applies to the income tax. After deducting 50% of the value of your investment from it, you are normally left with the other half of your investment lost. However, through SEIS Loss relief, you can ask for another income tax deduction accounting for the percentage represents your income tax from the lost half.

Carry-back relief

If you invest in an SEIS-eligible company and you respect the requirements and rules explained above, you can apply the earned tax deduction to the income tax of a previous year. However, you must not have acquired more than £ 100,000 worth of SEIS-eligible shares in the fiscal year you want to carry-back your deduction for.

Inheritance Tax Relief

If you hold the shares of an SEIS-eligible company you invested in for more than 2 years, those shares will be inheritance tax exempt.

Examples

First of all, let's talk about the benefits that apply to your previously obtained funds, once you decide to invest them in an SEIS-eligible company. If the money were obtained through the sale of an asset, you do not have to pay the Capital Gains Tax as long as you have the SEIS shares. If you invest the money obtained from a previously successful non-SEIS investment, you only have to pay 50% of the Capital Gains Tax for the value you decide to invest.

Now, let us say you decide to invest the maximum amount of £100,000 in a recently incorporated innovative startup. The startup we are talking about is offering a new solution and attracts multiple investors, you ending up owning 20% of the company in shares.

At the end of the fiscal year, £50,000 of your income tax will be deducted. Therefore, the startup or small business you invested in will benefit from a capital influx of £100,000 and your liquid assets will only decrease with half of that. If you want, you can apply this deduction to a previous tax year.

If the investment proves to be successful and profitable and the shares you acquired for £100,000 are sold for £300,000 after a minimum of three years, there is no Capital Gains Tax to be paid for the gained capital.

If the shares are held for two years, they will be exempt from the inheritance tax.

If the investment does not prove to be successful and the business fails to bring any revenue, the £100,000 you invested is not lost in its entirety. First of all, you get £50,000 back as an income tax deduction. Second of all, you can also ask for a loss relief, accounting for the percentage that represents your income tax from the remaining amount. So, if your income tax is 50%, you will get another deduction of £25,000. Therefore, at the end of the day, a bad investment of £100,000 will only cost you £25,000.

This is a big risk reduction procedure meant to encourage investors to invest in the developing and innovative UK business environment.

The Enterprise Investment Scheme (EIS)

The EIS tax relief scheme gives you similar advantages and benefits to the SIES scheme but targets bigger investments for more impactful business opportunities. The main point of this scheme and its most appealing advantage is 30% of the investment value deduction from the income tax.

This scheme is important for startups and businesses who need to attract higher investments. These investments usually attract bigger risks that deter investors from giving them full trust. Moreover, by giving sizeable tax deductions, the Government indirectly co-funds the investments, therefore giving more investors the opportunity to take part in the innovation process. The ones who did not have the necessary capital to spare into something they believe in can now do the same thing with fewer resources.

Conditions for investors

• - Regardless of the number of companies you invest in, you cannot get a tax deduction bigger than £ 300,000 (£ 1,000,000 investment) for each tax year.
• - You cannot be associated with the company that you invest in as an employee, manager, founder etc.
• - The shares you obtain through investment must be in your possession for at least 3 years.
• - You must be a UK taxpayer.
• - You cannot carry forward the tax relief.
• - You cannot acquire shares that are already listed on the market, but only newly-emitted ones.

What Tax Reliefs are available

Income Tax Relief

The conditions and rules for income tax relief are straight-forward. If the value of your investments in a tax year is not higher than £1,000,000, you can get a deduction of £300,000. If the value of your investments is lower than that, you’ll get a deduction of 30% of your investments.

Capital Gains Tax Relief

• - Disposal Relief: If you hold the assets you acquired through investments for at least three years and sell them for greater value than the one you paid for initially, you’ll be exempt from the Capital Gains Tax.
• - Deferral Relief: If you sell any assets in your possession in order to acquire shares in a company which qualifies for the EIS scheme, you are not required to pay the Capital Gains Tax until a later date (usually when you get rid of the EIS shares).

Capital Gains Tax Reinvestment Relief

If you made a previous investment of any kind which brought you financial gains and decide to reinvest them in a company which qualifies for the EIS scheme, you will be exempt from 30% of the Capital Gains Tax.

Loss relief

This kind of relief is applicable if the investment you made does not prove profitable or the business fails. This relief also applies to the income tax. After deducting 30% of the value of your investment from it, you are normally left with the remaining amount of your investment lost. However, through EIS Loss relief, you can ask for another tax deduction accounting for the percentage that represents your income tax from the lost amount.

Carry-back relief

If you invest in an EIS-eligible company and you respect the requirements and rules explained above, you can apply the earned tax deduction to the income tax of a previous year. However, you must not have acquired more than £ 1,000,000 worth of EIS-eligible shares in the fiscal year you want to carry-back your deduction for.

Inheritance Tax Relief:

If you hold the shares of an EIS-eligible company you invested in for more than 2 years, those shares will be inheritance tax exempt.

Examples

First of all, let us talk about the benefits that apply to your previously obtained funds, once you decide to invest them in an EIS-eligible company. If the money were obtained through the sale of an asset, you do not have to pay the Capital Gains Tax as long as you have the EIS shares. If you invest the money obtained from a previously successful non-SEIS investment, you only have to pay 30% of the Capital Gains Tax for the value you decide to invest.

Now, let us say you decide to invest the maximum amount of £1,000,000 in a business or startup. The company we are talking about is offering a new solution and attracts multiple investors, you ending up owning 20% of the company in shares.

At the end of the fiscal year, £300,000 of your income tax will be deducted. Therefore, the startup or small business you invested in will benefit from a capital influx of £1,000,000 and your liquid assets will only decrease with half of that. If you want, you can apply this deduction to a previous tax year.

If the investment proves to be successful and profitable and the shares you acquired for £1,000,000 are sold for £3,000,000 after a minimum of three years, there is no Capital Gains Tax to be paid for the gained capital.

If the shares are held for two years, they will be exempt from the inheritance tax.

If the investment does not prove to be successful and the business fails to bring any revenue, the £1,000,000 you invested is not lost in its entirety. First of all, you get £300,000 back as an income tax deduction. Second of all, you can also ask for a loss relief, accounting for the percentage that represents your income tax from the remaining amount. So, if your income tax is 50%, you will get another deduction of £350,000. Therefore, at the end of the day, a bad investment of £1,000,000 will only cost you £650,000.

This is a big risk reduction procedure meant to encourage investors to invest in innovative ideas and businesses which require a higher investment than the ones who fall under the SEIS requirements. This is highly beneficial for the business environment, as businesses which need high amounts of capital are having trouble in finding investors willing to risk such amounts of money.

Conclusion

These tax relief schemes are created by the UK Government in order to help startups and businesses find investors willing to risk their own funds for their success. Moreover, by offering a safety net for investors, there is a bigger incentive on their side to take a risk in order to gain revenue from innovation.

These schemes are two of the biggest incentives the UK business environment has to offer in order to grow and maintain its position as the most innovative and matured startup environment in the world.

Most recent SEIS and EIS opportunities on Angels Den

Maximising EIS and SEIS allowances is at the forefront of a lot of our investors' minds. That's why all our investment opportunities are EIS eligible and some are SEIS eligible as well. Click the button below to check them out and create an account if you want to be in touch with one of our Investor Relations Managers. 

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