If you’re considering using SEIS and EIS for raising investment in your business, you’ll be offering very generous tax incentives to your company’s potential backers.
EIS dates back to 1994, joined by SEIS in 2012. While not removing risk from potential investors completely, these two schemes do offer safety nets to people using their own money to back promising businesses.
Smart Team looks at the two systems in this article.
Smart Team Tip – They are great schemes but complicated so we’ve tried to describe everything in layman’s terms. SEIS and EIS are superb ways of saving money on tax but please come to us for support and advice before making or not making any investment decision.
SEIS and EIS for raising investment – the Seed Enterprise Investment Scheme (SEIS)
SEIS is designed for individuals who wish to invest in smaller companies. To qualify under SEIS rules, the company must have fewer than 25 staff, have less than £200,000 in gross assets, and be less than two years old.
Shares are exempt from inheritance tax as long as you’ve owned the share for at least two years.
The maximum amount you can invest in SEIS schemes in any tax year is capped at £100,000.
SEIS and EIS for raising investment – SEIS income tax relief
Let’s consider the case of the London Opera Hat Company Ltd (LOHCL), an ambitious new online start-up looking to corner the market in 19th century fop and dandy headgear.
Income tax relief is set at 50 percent of your investment. This means that if you invest £10,000 in LOHCL which qualifies for SEIS, you can deduct £5,000 from your income tax bill as long as you hold onto your shares for a minimum of 3 years.
What if your income tax liability is less than £5,000? Then you can claim against the income tax liability you have actually incurred but you won’t be due all of the £5,000. For example, if your income tax bill was £4,000, you could claim all that £4,000 back but you wouldn’t be entitled to receive the additional £1,000 from the taxman to make it up to £5,000. That’s because you didn’t pay £5,000 in income tax.
You can claim for this relief up to 5 years after the 31st January following the financial tax year in which you made the investment. You can also choose to treat the shares as having been issued in the previous tax year so you can use up income tax relief from that period.
Income tax relief does not apply if you own more than 30% of a company’s share capital or control more than 30% of its voting rights.
SEIS and EIS for raising investment – SEIS capital gains tax (CGT) exemption relief
Similarly, an investor can defer 50% of CGT up to the amount of their investment.
On your investment into LOHCL of £10,000, your CGT exemption saves you £1,400 in tax. How? CGT is at 28%. Normal CGT on £10,000 would be £2,800. 50% relief takes this down to £1,400.
Smart Team note – CGT is currently 10% for basic rate tax payers so the relief would be £500. For higher rate tax payers, CGT is 20% so the relief would be £1,000.
Please be aware that your exempted CGT might become repayable to HMRC if the following occurs within three years of your making the investment – you dispose of the SEIS shares, you cease to be a UK resident, or the SEIS shares cease to be eligible.
SEIS and EIS for raising investment – SEIS capital gains tax (CGT) exemption
If you decide to diversify out of 19th century headgear and dispose of your shares more than three years after you bought them, you can claim exemption from CGT for the shares which originally qualified for income tax relief.
If income tax relief was not granted on the full amount you invested, you can claim a proportion of the gain with your CGT exemption.
SEIS and EIS for raising investment – SEIS relief for losses
Unfortunately, LOHCL didn’t survive leaving a trial of disappointed investors behind it. Fortunately, though, if your loss is greater than the amount you claimed in income tax relief, you can benefit from further income tax relief at the rate you pay income tax at generally.
In this table, we examine how a failed investment of £15,000 would affect basic, higher, and additional rate taxpayers.
|Your original investment||£15,000||£15,000||£15,000|
|Income tax relief||£7,500||£7,500||£7,500|
Now, let’s move onto SEIS’s older sibling, the EIS.
SEIS and EIS for raising investment – the Enterprise Investment Scheme (EIS)
As with SEIS, there are lots of tax reliefs available for investors in EIS-compliant companies but to see the value of them, you have to hold onto your shares for three years as a minimum.
Whereas SEIS investment is capped at £100,000 a year, EIS investment has a ceiling of £1,000,000. After two years, your investment can be free from inheritance tax as it qualifies for Business Property Relief.
To qualify for EIS, the company you’re investing in needs to have 250 staff or fewer and maximum gross assets pre-investment of £16,000,000. The company must be unlisted (not quoted on a major stock market) although it can list on markets like AIM or ISDX.
As with SEIS, those who value liquidity in their investments should think carefully before making an EIS investment. There is no easy way to sell your shares. You may find no buyers for the three years you hold the shares or even after that point.
Why invest? For both schemes, while the risk of failure is high, the potential upside is enormous. If the company you’re investing in hits or exceeds its ambitious sales forecasts, keeps costs under control, and has a talented but modest board, your £10,000 investment might soar in value during the time you hold it.
So, what do you need to know about tax reliefs available under EIS? What’s on offer and how could it attract investors to your business?
SEIS and EIS for raising investment – EIS income tax relief
Let’s look at the investment opportunity afforded by “Transatlantic Zeppelin Ltd” (TZL) looking to establish new holiday flight routes for this revived form of air gondola.
Income tax relief is set at 30% meaning that you can reduce your income tax bill by £3,000 in a year where you invested your £10,000 into TZL. You must hold onto your shares for 3 years after purchase to qualify for this relief.
If you have paid less than £3,000 that year in income tax, you can only claim back for the amount of income tax that you did pay.
Income tax relief cannot be claimed if you owned 30% or more of the issued share capital or controlled more than 30% of its voting rights two years before EIS shares were issued and ending three years after they were issued. You cannot be employed by or a director of the company or any of its subsidiaries or a partner of the company or its subsidiaries.
Smart Team tip – on EIS investments, the notion of connectedness is crucial to whether you qualify for income tax relief. Please contact us to talk about your situation.
SEIS and EIS for raising investment – EIS capital gains tax (CGT) deferral relief
You can defer tax on the disposal of assets if you make your EIS investment in a period beginning one year before and ending three years after you benefited from your gain.
Please be aware that your deferred CGT might become repayable to HMRC if the following occurs within three years of your making the investment – you dispose of the EIS shares, you cease to be a UK resident, or the EIS shares cease to be eligible.
Smart Team tip – deferment can sometimes work against you. Please contact us to talk about strategies to maximise tax savings.
SEIS and EIS for raising investment – EIS capital gains tax (CGT) exemption
You can claim exemption from CGT for shares which qualified for income tax relief as long as you held onto your shares for 3 years or more.
If income tax relief was not granted on the full sum you invested, make sure to claim a proportion of the gain back with your CGT exemption.
SEIS and EIS for raising investment – EIS relief for losses
TZL Limited enjoy an early rush of confidence from investors but by the time the service was ready to book paying travellers, they didn’t come. TZL went into liquidation leaving investors nursing some serious losses.
Thankfully, tax reliefs mitigated much of those losses in a way shown by this table.
|Your original investment||£15,000||£15,000||£15,000|
|Income tax relief||£4,500||£4,500||£4,500|
|Net cost to investor||£10,500||£10,500||£10,500|
|Cost to investor after tax||£7,350||£6,300||£5,775|
SEIS and EIS for raising investment – Smart Team verdict
If you’re looking for investment into your business or if you’re looking for a tax-efficient way to invest in exciting companies, SEIS and EIS are superb vehicles.
Please do not make any decision to invest or not to invest based upon the information in this article. While we believe it is completely accurate, every person and every company’s situation is different. We strongly urge you to seek help from the Smart Team.
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