As an early-stage investor, you likely want to keep your hard-earned returns. Costs, inflation and taxes can act against you. However, there are tax-efficient “vehicles” available to help you lower needless costs and preserve your capital.
Two examples in the UK are the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS). Both offer investors powerful tax reliefs and other benefits, but they operate slightly differently.
In this guide, we explain their unique features, how they can be used to your advantage, and ideas on how to integrate them – working together to maximise your investment goals
What are EIS and SEIS?
Both EIS and SEIS are UK government-backed initiatives to encourage investment in start-ups and small businesses by offering substantial tax reliefs.
For instance, EIS was launched in 1994 and offers angel investors (and other early-stage investors) the chance to invest in established small companies whilst potentially saving on income tax, capital gains tax (CGT) and inheritance tax (IHT).
SEIS was launched later in 2012 and targets very early-stage companies – businesses in their formative stages and typically have less than two years of trading history. Here, the relief is more generous than EIS for income tax, but the risk is generally higher.
Which Companies Qualify?
A key difference between SEIS and EIS lies in the eligibility requirements for the companies receiving investment. For instance, a company must pass a 4-month “active trading” rule before shares are issued and trade for less than 3 years to qualify for SEIS investment. Under EIS, a company must have traded for less than 7 years – unless they are “knowledge-intensive”, in which case, it is <10 years.
There are other restrictions on companies that might want to apply to EIS or SEIS. Companies must have less than £15 million in gross assets (pre-investment) to apply for the former, and for the latter, these assets must be below £350,000. For employees, the numbers must fall below 250 and 25, respectively.
A final consideration for founders is funding potential. Under EIS, a company can raise a total of £12 million from investors (or £20 million if it is knowledge-intensive). Under SEIS, the maximum total investment potential is £250,000
Comparing Tax Reliefs
Both SEIS and EIS offer a suite of tax benefits to investors, but SEIS provides more generous upfront reliefs, given the increased investment risk.
EIS offers 30% income tax relief on investments up to £1 million per tax year (or £2 million if invested in knowledge-intensive companies). For instance, suppose an additional rate taxpayer makes a £10,000 EIS investment. They could later claim back £3,000 on their tax return.
By contrast, SEIS offers 50% income tax relief on investments up to £200,000 per tax year. In this case, a £10,000 investment could allow an investor to claim back £5,000 after submitting Self Assessment for the tax year.
Both schemes allow investors to generate tax-free gains on the sale of shares after the 3-year minimum holding period. They differ slightly in capital gains tax (CGT) deferral. Under SEIS, if an investor reinvests a capital gain (from a non-SEIS asset) into an SEIS-qualifying company, up to 50% of that gain can be exempt from CGT. By contrast, under EIS, full CGT deferral is available for reinvested gains.
Both SEIS and EIS allow loss relief against income or capital gains. This can lower the risk of investing in early-stage companies by reducing the effective loss incurred. For instance, imagine an additional rate taxpayer invested £100,000 into an EIS-qualifying company. Here, £70,000 is “effectively invested” after 30% up-front income tax relief.
If the company later fails, the investor could claim 45% loss relief on the effective investment – resulting in a loss of £38,500 instead of £100,000. Under SEIS, a £100,000 investment would result in a loss of £27,500.
Using EIS and SEIS Strategically as an Investor
One powerful strategy for angel investors is to combine SEIS and EIS in a staggered approach. For instance, an investor could start with an SEIS investment to benefit from 50% income tax relief and CGT reinvestment relief.
Later, as the company scales, the investor could make a follow-on investment under EIS to support scaling operations and access 30% tax relief with CGT deferral. This could be done if the startup is prudent and structures its funding rounds to accommodate both schemes.
However, investors should consider best principles when approaching EIS and SEIS. In particular, diversification is important – especially when dealing with higher-risk investments, such as startups. Comprehensive due diligence is also essential to assess the founding team, market potential and business model viability.
For many investors, the best approach is not an either/or decision regarding the two schemes. Rather, a blended strategy can let someone leverage SEIS for initial high-risk, high-reward opportunities, whilst EIS can open doors for follow-on or later-stage investments.
Combined, they offer powerful tax incentives, making early-stage investing not only impactful for the economy but also financially compelling.
Invitation
Want to speak to us about our early-stage opportunities here at our exclusive investor network? Get in touch today to explore our pre-vetted EIS and SEIS projects here at Bure Valley Group.
