Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are generous tax incentive scheme created to encourage seed investment in early stage businesses.
The SEIS offers both income tax and capital gains tax relief to qualifying investors who subscribe for shares in qualifying companies. The interested parties may contact HMRC who will assess whether a company is eligible under the SEIS scheme.
The difference between SEIS and EIS is that the SEIS is focused on very early-stage companies and offers significantly greater Income Tax relief which can reach up to 50% against the amount invested.
The criteria below is needed to satisfy the qualifications for SEIS and EIS scheme:
- The maximum amount to be raised for each company to qualify is £150,000.
- The company must have 25 or less employees and gross assets of up to £200,000. Also the company must have traded for less than two years prior to having issued the shares.
- The shares must be issued wholly for cash and be held by the investor for more than three years.
- The shares cannot bear any preferential rights.
The benefits of SEIS and EIS are:
- Investors, including directors, can receive initial Income Tax Relief of 30-50% on a maximum annual investment of up to £100,000 and Capital Gains Tax (CGT) exemption for any gains on the SEIS shares. The shares must be held for three years from the date the shares were issued or the date the trade actually started.
- No capital gains tax is paid on profits earned on shares which are held for more than three years. Capital gains which are realised before three years has expired, but which are reinvested into qualifying SEIS shares, will also be exempt from capital gains tax. Again, the annual limit is £100,000. So, if you invest £10,000 and five years later sell your shares for £20,000, you’ll get the full benefit of the £10,000 profit, saving you at least £1,800.
- Under the SEIS and EIS schemes, it may be possible to claim loss relief. Should the company go bankrupt, investors may claim loss relief on their investment equal to half of their total investment multiplied by their tax rate.
- Individuals and trustees of certain trusts can defer their capital gains tax payment for gains of qualifying EIS shares. The investment must be made within one year before the gain was made or three years after the gain was made.
- Also, under the SEIS and EIS scheme one can apply for up to 100% inheritance tax relief provided the investments have been held for at least two years at time of death.
|Advantages of SEIS and EIS||Disadvantages of SEIS and EIS|
|For the investor, it’s a tax efficient way to invest in small companies.||Individual investor can be a director of the company but not an employee.|
|Income Tax relief up to 50% and possibility of full exemption of Capital Gains Tax on qualifying shares.||An individual’s stake in the company can be no more than 30%.|
|Possibility of Capital Gains Tax deferral relief.||SEIS tax relief applies only to recently incorporated companies.|
|EIS seeks to encourage investing into unlisted companies.||Investors are locked in for a minimum 3 years.|
|Possibility to claim up to 100% Inheritance tax relief.||Aimed at sophisticated investors.|
|Possibility to claim loss relief in case of loss or bankruptcy.||No easy way to sell your shares as companies are not listed on stock market.|