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SEIS (the Seed Enterprise Investment Scheme) and EIS (the Enterprise Investment Scheme) are two attractive schemes that investors can use to invest tax-efficiently in early-stage UK companies. Yet what are the similarities and differences? How can they be integrated effectively into an investor’s portfolio? Below, we offer some answers for the 2022-23 tax year. We hope you enjoy this content. To find out more about our investment opportunities, visit our portfolio page here. To enquire regarding our latest projects and funding, you can reach us via:
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EIS & SEIS: an overview
Both EIS and SEIS were introduced relatively recently by the UK government – the former in 1994 and the latter in 2012. Together with venture capital trusts (VCTs), they comprise the UK’s three tax-based venture capital schemes. They intend to encourage investment into the country’s early-stage companies due to their potential to generate employment and economic growth. They do this, primarily, by offering a range of attractive tax breaks to investors, although the precise benefits and rules differ slightly between the two schemes.
Similarities between EIS & SEIS
Both schemes are similar in their treatment of capital gains. After shares are held for three years no capital gains tax (CGT) is due on EIS or SEIS investments. Both also offer investors relief on inheritance tax (IHT) via Business Relief if shares are held for at least 2 years. EIS and SEIS tax benefits can only be accessed by investors with a UK tax liability (although you do not need to live in the UK). You must also not be employed in the EIS/SEIS-qualifying company that you are considering investing in. You must not be an “associate” either (or “connected” in the case of EIS). You must hold your shares for at least three years to access tax relief from EIS or SEIS. You cannot have any “linked loans” to the company in question (for at least two years before the investment in the case of EIS), and your investment must pose a genuine “risk of capital” – i.e. no tax avoidance as understood by HMRC under its venture capital conditions.
Differences between EIS & SEIS
Both schemes offer up-front income tax relief on investment, although the rates differ at 30% for EIS and 50% for SEIS). The former represents an effective net outlay of 70p in the £ whilst the latter represents 50p in the £. Both EIS and SEIS also offer loss relief if an investment fails. For EIS, the maximum exposure is 38.5p in the £ (for a 45% taxpayer). For a SEIS investor, the maximum is 27.5p in the £ or 13.5% if the investor claims CGT Reinvestment Relief).
The criteria applied to companies wanting to gain EIS or SEIS status also differ. For companies that wish to join EIS, they must employ no more than 250 employees (or 500 if deemed to be a “knowledge-intensive” company). They must have traded for no more than 7 years and gross assets cannot exceed £15m. For those applying for SEIS status, the company must have fewer than 25 employees and gross assets under £200,000. The trading period must be under 2 years and there is a total £150,000 funding limit under the scheme (for EIS, up to £5 million in total can be raised in any 12-month period).
Investors should also be aware of the different requirements they must meet to qualify for tax breaks under EIS or SEIS. For SEIS, you can be a director of the company in question and receive reasonable compensation for this position (although you cannot be an “associate”). For EIS, however, the “connection” rules largely govern how “close” you can be to the company. Yet even for SEIS, you cannot have a “substantial interest” in the company – e.g. you cannot have more than a 30% stake in the business. There are also differences in how much you can invest in the two schemes. For SEIS the limit on tax relief is £100,000 per tax year. For EIS it is £1m or £2m if you invest in knowledge-intensive companies.
Which scheme is right for you?
To an extent, this depends on your risk tolerance. The more a company is in its infancy the more likely it is to fail (generally speaking). Since SEIS is restricted to companies which have traded for less than 2 years, this broadly makes the investments riskier compared to EIS companies (which can trade for up to 7 years; at which point, strong profitability may be established). However, the growth potential is often greater in the early years of a business, so investors may be able to access higher returns. Your tax plan also matters when considering EIS and SEIS. For instance, SEIS may offer a higher initial tax saving due to the higher up-front income tax relief on offer. Yet the limit on SEIS investment (per tax year) is lower compared to EIS, so the latter may be more attractive to certain investors with more capital to commit. Speak with a financial adviser if you want to explore how to best integrate SEIS and EIS into your wider tax/investment plan.
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