The tax advantages of EIS and SEIS investing
One of the biggest challenges for small, or medium-sized, businesses is how to achieve growth without the necessary finances to fund expansion. Often entrepreneurs and business owners see it as a case of their ambitions being hindered by red tape and regulations.
However, this really isn’t the case. All too often, founders and owner-managers are simply unaware of all the debt and equity options available to them. For example, the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) have been designed by the UK Government to make it easier for small and medium-sized enterprises (SMEs) to raise finance to fuel growth.
What you need to know about SEIS & EIS
Unlike many of the schemes introduced by the UK Government, the SEIS only applies to businesses that are in the very early stages of their lifecycle - under two years old. The aim is to help them raise funding by reducing risk for investors. An investor can fund up to £200,000 in SEIS-eligible businesses in any given tax year under this scheme and then claim up to 50% of this back through Income Tax relief.
The EIS is similar but allows for larger funding rounds and applies to larger businesses than for SEIS. In this instance, investors can invest up to £1m in EIS-eligible businesses in any given tax year and subsequently claim up to 30% of this back through Income Tax relief.
The benefits of these schemes are significant for businesses and investors alike. Investors reduce their risk of investing whilst a business not only raises finances but is able to do so without the additional costs of servicing bank loans. The business also gets to benefit potentially from the investor’s knowledge, skills, and network of contacts.
Interesting for investors
Whether you’re an entrepreneur with experience in investing in companies, or new to the world of investment, the benefits of SEIS and EIS are significant:
- Enjoy a stake in a company that has ambitious plans to grow
- No potential Capital Gains Tax to pay on your shares when you look to sell, subject to some specific conditions
- 50% Capital Gains Tax relief on gains from an investment in a non-SEIS company (if the gains are reinvested into a SEIS-eligible company)
- Deferral relief allows investors to re-organise and defer existing Capital Gains Tax liabilities to later years
- Up to 50% Income Tax relief (SEIS)
- If a business doesn’t do well and you end up selling your SEIS shares at a loss, you can claim SEIS loss relief
- No Inheritance Tax on SEIS shares as long as they have been held for at least two years
- Potential to earn multiple returns with a reduced base cost and no tax payable
Benefits for businesses
For a business, the SEIS and EIS schemes can help them achieve their objectives and goals, whilst gaining some unique and vital insight along the way. This includes:
- Raising much needed finance
- Benefiting from the knowledge, and network of contacts of the investor
- Mentoring opportunities for decision makers within the business
- No need to keep up with the costs of servicing bank loans
- Further potential to raise more capital through VCTs
As with any initiative, the SEIS and EIS will suit some businesses and investors more than others. SEIS and EIS are incredibly specific, and the rules and regulations are quite complex. Here are a few considerations:
- Is the company eligible?
- Investors must be liable for UK Income Tax
- You can’t be an employee of the company you’re investing in (but you can be a paid director)
- Investors must not have a ‘substantial interest’ in the company
- No related investment arrangements
- No linked loans
- An investment must be made for genuine commercial reasons and not as part of a scheme or arrangement intended to avoid tax
- Shares must be kept for at least three years
- Shares must be paid upfront
- Investors must not receive value from the company for three years
As you can see, when the SEIS and EIS are used correctly, they can offer value to both a business looking to scale-up and an investor looking for their next challenge. The benefits are substantial, but the regulations are complex. Speaking to a tax advisor and accountant to guide you, either as a business or investor, will ensure you’re equipped to make the right moves to maximise the opportunities presented by these schemes.
Find out more about investment schemes with Wellers.