SEIS & EIS – common investor questions, answered

By December 17, 2021For Angel Investors

Bure Valley Group is an investment introducer platform which links successful investors with exciting, innovative UK startups seeking funding. This content is for information purposes only and should not be taken as financial or investment advice. 

Our previous article touched upon two popular schemes for those interested in early-stage UK company investments: EIS and SEIS (the Enterprise Investment Scheme and Seed Enterprise Investment Scheme. Yet the rules governing them can be complex, leading even sophisticated investors to have many questions about how they work and the best way to integrate them into an investment portfolio. Below, our team at Bure Valley Group addresses some of the most common questions in 2021-22 relating to the two.

We hope you find this content useful. To find out more about our EIS, SEIS and other investment opportunities, visit our portfolio page here. To enquire regarding our latest projects and funding (for investors and founders, respectively), you can reach us via:

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Why do both EIS & SEIS exist?

Given that the two schemes share lots of similarities and target earlier-stage businesses, this seems like a fair question. Why not just have EIS or SEIS – why does the UK government offer both? Part of the reason lies in the target company for each scheme. 

Whilst EIS is intended to help attract investment to companies which have already established strong growth, SEIS is targeted at much younger startups. This is reflected in the criteria for the two schemes. For instance, an EIS business must have no more than 250 employees whilst an SEIS company can only have a maximum of 25 employees. 

Additionally, the former can only have gross assets valued up to £15m whilst for the latter the cap is £200,000. SEIS companies must also have traded, at most, for two years.

 

Why are the tax reliefs different?

Whilst both EIS and SEIS share similarities, they also offer different tax reliefs to investors. This is partly to reflect the (typically) greater risk of investing in smaller companies qualifying for the SEIS. As such, the reliefs are more generous.

In particular, investors committing capital to EIS-qualifying companies can receive 30% initial Income Tax relief on the value of their EIS investments (capped at £1m per tax year). However, when investing in SEIS-qualifying companies the Initial Income Tax relief is 50% on the value of their SEIS investments (capped at £100,000 per tax year). 

 

How do I protect my investments from IHT?

One of the great benefits of both EIS and SEIS investments is that they can be shielded from inheritance tax (IHT) when you die. However, this is not automatic – both can receive Business Relief, up to 100%, if the shares are held for at least two years.

Given that IHT in 2021-22 stands at 40% on the value of your estate over £325,000, SEIS and EIS can be powerful tools not only for accessing powerful returns, but also for estate planning. However, you should consider seeking professional financial advice about your IHT plan.

 

How does “loss relief” work?

Given that EIS and SEIS involve investing in “higher-risk” companies (due to their earlier stage in the business lifecycle), they both offer generous “loss relief” mechanisms to reduce investor losses should an EIS/SEIS company fail. 

Here, the rules are different between the two schemes – although the basic idea is the same. In the case of both, if shares are sold at a loss then these can be offset against the investor’s CGT (capital gains tax) or Income Tax bill. 

However, the loss relief works out differently mainly due to differences between EIS and SEIS in initial  Income Tax relief (30% and 50%, respectively). For the former, this results in a maximum exposure of 38.5p in the pound – for an Additional Rate taxpayer (45%). For the latter, however, the maximum exposure is 27.5p in the pound (or, 13.5% if CGT Reinvestment Relief is claimed). These are complex tax rules, so again, it can be worth seeking professional advice to help you.

 

How much of my portfolio should comprise EIS/SEIS?

The answer to this question depends on a range of factors. In particular, what is your investment risk appetite? If you are a naturally “cautious” investor, for instance, then investing in early-stage businesses – with a higher risk of failure – may not be for you. If, however, you are prepared for the chance that you may lose money, but could also “win big”, then these can be good options.

Your financial goals also matter hugely. As touched on above, if you are seeking to mitigate a looming IHT bill and you have already exhausted other options to mitigate tax (e.g. pensions), then EIS and SEIS can be good options to pass down wealth tax-efficiently to loved ones when you die. However, given the risk involved with EIS and SEIS companies, most people will want to limit their portfolio exposure to these schemes – unless advised otherwise by a professional.

 

Can I invest in both EIS & SEIS

Yes, you can. In fact, a single company can qualify for both at different stages of its lifecycle – successfully applying for SEIS in its first two years, for instance, and then going on to gain EIS status thereafter. The main limitation for investors is the cap placed on the total value of your EIS and SEIS investments each tax year (e.g. £1m and £100,000, respectively).

 

Invitation

Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:

+44 160 334 0827

 [email protected]