EIS and SEIS

For investors looking to invest in small businesses, Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) can provide an attractive options with significant tax incentives. These schemes are government-backed and designed to encourage investment in start-up and early-stage companies, with tax reliefs ranging from income tax relief to capital gains tax relief.

However, navigating the rules and regulations surrounding SEIS and EIS can be complex, and it’s essential to understand the benefits and risks associated with these schemes before investing. This article will explore SEIS and EIS in-depth, including eligibility requirements, tax benefits, and the differences between the two schemes. We will also discuss the minimum holding period for EIS, the 75% shareholding rule, and the SEIS 7-year rule, among other important topics, to help you make informed investment decisions.

SEIS and EIS investments provide an income tax break for investors. For SEIS, the tax break is 50% of the amount invested, up to £100,000. For EIS, investors can claim 30% tax relief on their investment, up to £1 million. In addition to income tax relief, both SEIS and EIS investments are exempt from capital gains tax (CGT) if they are held for at least three years. Investors can also claim loss relief on the amount invested if the company fails.

Investors interested in SEIS and EIS investments can find qualifying companies using online platforms like Crowdcube and Seedrs. They can also contact financial advisors for recommendations on eligible companies.

Before investing, investors should carefully consider the risks involved in early-stage investments. These risks include the possibility of losing all or a significant portion of the investment and the limited market for selling the shares. Investors should also ensure that the company they invest in qualifies for the schemes and meets all the requirements.

The role of accountants in SEIS and EIS investments

Accountants are crucial in helping businesses and investors with SEIS and EIS investments. Accountants can advise on eligibility criteria, tax planning, compliance with investment rules, and identifying eligible investors. They can also help businesses complete and submit the documentation required for SEIS and EIS schemes, such as advance assurance and compliance statements.

Businesses can benefit from their experience and expertise in tax planning and financial reporting when working with an accountant. Accountants can help businesses structure their investments to maximise the tax reliefs available and ensure that all legal and tax requirements are met.

For investors, accountants can assist with calculating tax reliefs and ensuring that all investment rules are followed. They can also help investors assess the risks involved in early-stage investments and work alongside independent financial advisors who can suggest suitable companies for investment.

SEIS and EIS Case studies

Case studies of successful SEIS and EIS investments can provide valuable insights into these schemes’ potential benefits and risks. One such example is the success of Revolut, a UK-based digital banking startup that raised £3.8 million through an EIS funding round. The company became a unicorn, with an over £5 billion valuation. Another example is Monzo, a UK-based digital bank that raised over £4 million through a crowdfunding campaign. Monzo has since gone on to become one of the most popular challenger banks in the UK, with over 4 million customers.

These case studies demonstrate the potential for SEIS and EIS investments to support early-stage businesses and generate significant returns for investors. However, investors should note that these success stories are not the norm, and investing in early-stage businesses involves significant risks.

Alternatives to SEIS and EIS:

While SEIS and EIS can be attractive options for raising funds, they are not suitable for every business. Alternative funding options for start-ups and small businesses include crowdfunding, venture capital, and traditional bank loans.

Crowdfunding platforms like Kickstarter and Indiegogo provide an alternative funding option for businesses looking to raise capital. Crowdfunding involves raising small amounts.

What are the SEIS and EIS?

The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are UK government initiatives designed to help small businesses raise funds and attract investors. SEIS is aimed at start-up companies, while EIS is designed to help established businesses grow.

SEIS and EIS schemes offer tax relief to individual investors who buy shares in qualifying companies. To be eligible, the shares must meet specific requirements, including being paid up in full, in cash, on issue, and full-risk ordinary shares without special rights to the company’s assets. Both schemes require that the company uses the funds raised for growth and development and carries a risk-to-capital condition.

SEIS allows businesses to receive a maximum of £150,000, including any other de minimis state aid received in the three years up to and including the investment date. EIS allows businesses to raise up to £5m annually and a maximum of £12m in the company’s lifetime, including amounts raised under other schemes. Special rules apply to knowledge-intensive companies that extend time and investment limits.

Investors in SEIS and EIS schemes can benefit from attractive tax reliefs, including income tax relief on their investments and exemption from capital gains tax if the shares are held for at least three years. The amount of tax relief depends on the scheme, with SEIS offering a maximum of 50% of the amount invested, up to £100,000, and EIS offering 30% tax relief on their investment, up to £1 million.

Investors interested in SEIS and EIS investments can find qualifying companies by using online platforms such as Crowdcube and Seedrs or by contacting professional advisors such as financial advisors and accountants. Investors should consider the risks involved in early-stage investments before investing, including the possibility of losing all or a significant portion of the investment.

SEIS and EIS schemes have specific rules and regulations that businesses and investors must follow to qualify for tax relief. Companies can seek advance assurance from HM Revenue and Customs (HMRC) before issuing shares, and investors must hold the shares for a minimum period before claiming tax relief.

Who is eligible for SEIS in the UK? To be eligible for SEIS, the company must have gross assets of no more than £200,000 and have fewer than 25 employees. The company must also carry out a new qualifying trade, which means it cannot have traded before or for more than two years. In addition, the company must not be listed on a recognized stock exchange and must not have received investment under the EIS, Venture Capital Trust (VCT), or Social Investment Tax Relief (SITR) schemes.

What qualifies for SEIS? To qualify for SEIS, the shares must meet specific requirements, including being paid up in full, in cash, on issue, and full-risk ordinary shares without special rights to the company’s assets. The company must also use the funds raised for growth and development and carry a risk-to-capital condition.

How much can you claim for SEIS? Investors in SEIS can claim income tax relief of up to 50% of the amount invested, up to a maximum of £100,000. In addition, investors can defer capital gains tax on other investments by reinvesting those gains in SEIS-eligible companies.

Who can claim SEIS tax relief? Individuals who are UK taxpayers can claim SEIS tax relief. Investors must hold the shares for at least three years to claim the tax relief.

What are the tax benefits of SEIS? Investors in SEIS can benefit from attractive tax reliefs, including income tax relief on their investments and exemption from capital gains tax if the shares are held for at least three years. The amount of tax relief depends on the scheme, with SEIS offering a maximum of 50% of the amount invested, up to £100,000.

Do you pay tax on SEIS? Investors in SEIS are not required to pay income tax on the portion of their investment that qualifies for tax relief.

What is SEIS or EIS tax relief? SEIS and EIS tax relief refer to the tax incentives offered to investors who buy shares in qualifying companies under these schemes. The tax relief includes income tax relief, capital gains tax relief, and loss relief.

What is the difference between SEIS and EIS? SEIS is aimed at start-up companies, while EIS is designed to help established businesses grow. The maximum amount that can be raised under SEIS is £150,000, while EIS allows businesses to raise up to £5m each year and a maximum of £12m in the company’s lifetime. The tax relief available under each scheme also varies.

Can you do both SEIS and EIS? Investors can invest in both SEIS and EIS companies. However, some rules and limits must be followed, and investors must ensure they do not exceed the limits for tax relief under each scheme.

What is the tax benefit of EIS? Investors in EIS can benefit from income tax relief of up to 30% of their investment, up to a maximum of £1 million. EIS investments are also exempt from capital gains tax if the shares are held for at least three years. In addition, investors can defer capital gains tax on other investments by reinvesting those gains in EIS-eligible companies.

What is the minimum holding period for EIS? Investors in EIS must hold the shares for at least three years to qualify for tax relief.

What is the 2-year rule for EIS? The 2-year rule for EIS states that the company must have performed a qualifying trade for at least two years before the EIS investment.

What is the maximum shareholding for EIS? Individual investors can hold up to 30% of the shares in an EIS-eligible company.

How much tax break do you get for EIS investment? Investors in EIS can receive income tax relief of up to 30% of their investment, up to a maximum of £1 million.

Do you pay capital gains on EIS? Investors in EIS are exempt from paying capital gains tax on the shares if they are held for at least three years.

What happens if I sell my EIS shares within three years? If EIS shares are sold within three years, the investor will lose their tax relief on the investment. In addition, they may be required to repay any tax relief already claimed.

What is the 75% shareholding rule? The 75% shareholding rule applies to EIS-eligible companies. It states that the company must not be under the control of a company or companies that hold more than 75% of the ordinary shares.

Can EIS shares pay dividends? EIS shares can pay dividends, but the company must qualify and meet the EIS rules and regulations.

Are EIS shares exempt from CGT? If held for at least three years, EIS shares are exempt from capital gains tax.

Are EIS investments worth it? Investing in EIS-eligible companies can offer attractive tax reliefs, but it also carries a higher level of risk than other types of investments. Considering the risks and seeking professional advice before investing carefully is essential.

What is the SEIS 3-year rule? The SEIS 3-year rule states that investors must hold the shares for at least three years to qualify for tax relief.

What happens if an SEIS company goes bust? If an SEIS company goes bust, investors may be eligible for loss relief, which can be offset against their income tax liability.

How long do you have to hold SEIS shares? Investors in SEIS must hold the shares for at least three years to qualify for tax relief.

What is the SEIS 7-year rule? The SEIS 7-year rule requires that the company must not have received any other state aid in the seven years before the SEIS investment.

Does SEIS expire? SEIS does not expire, but the rules and regulations may change over time.

Is there a minimum investment for SEIS? There is no minimum investment for SEIS, but the maximum amount that can be raised is £150,000.

Can I invest in my own company through SEIS? Directors of the company can invest in their own company through SEIS, but some rules and limits must be followed.

Can I be a director with SEIS? Directors can be involved with SEIS-eligible companies, but some rules and limits must be followed.

How old does a company have to be for SEIS? The company must not have traded before or for more than two years to be eligible for SEIS.

What is the 6-month rule in stocks? The 6-month rule in stocks refers to the holding period for shares to qualify for certain tax reliefs, such as capital gains tax relief.

In addition to the attractive tax reliefs offered by SEIS and EIS schemes, investors may also benefit from inheritance tax (IHT) relief. This is because shares in qualifying SEIS and EIS companies are typically exempt from IHT after they have been held for two years.

Investors can also benefit from IHT relief on the amount invested in SEIS or EIS if the investor dies within three years of investing. This means that the value of the investment is not included in the investor’s estate for IHT purposes.

It is important to note that while SEIS and EIS investments can provide IHT relief, this should not be the sole reason for investing. It is essential to consider the risks associated with investing in start-ups and early-stage companies and seek professional advice before investing.

Summary

In summary, SEIS and EIS schemes offer attractive tax incentives to investors who buy shares in qualifying small businesses. SEIS is aimed at start-up companies, while EIS is designed to help established businesses grow. The tax relief available under each scheme varies, but investors can benefit from income tax relief, capital gains tax relief, and loss relief. Shares in qualifying SEIS and EIS companies are also typically exempt from IHT after they have been held for two years. However, it is essential to carefully consider the risks associated with investing in start-up and early-stage companies and seek professional advice before investing.

At Mercian Accountants, we understand the complexities involved in SEIS and EIS investments and the importance of careful planning and compliance to ensure that you receive the full benefits of these schemes. Our experienced team can provide expert guidance on SEIS and EIS investments, from initial eligibility assessments to completing compliance statements. Whether you are an entrepreneur seeking funding or an investor looking to invest in small businesses, we can help you navigate the rules and regulations surrounding these schemes and make informed decisions. Contact us today to discuss your SEIS and EIS investment needs and take the first step towards achieving your business or investment goals.