An Introduction to SEIS and EIS
The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are important for UK Angel Investors and Founders. If Founders understand the benefits of (S)EIS to investors it can help them attracting and negotiating investment.
What is SEIS?
SEIS is a government approved scheme to encourage investment into early stage companies. It lowers an investor’s risk of investing in young companies by them offering tax relief. Qualifying companies can raise up to £150,000 under the SEIS scheme.
An individual investor can invest as much £100,000 in any tax year. In return HMRC provides initial income tax relief of up to 50% of the value of the money invested. This automatically takes away 50% of the risk of investment.
If the company succeeds and the investors make a gain on the sale of his/her shares, the gain is exempt from Capital Gains Tax (CGT). If the company fails, the investors can offset the loss on the shares against their income tax bill.
This means there is a win-win on all sides. Investors have any potential risk reduced, Founders receive funding and the UK economy sees investment in its most innovative businesses.
What is EIS?
For those companies which outgrow the SEIS scheme, the EIS scheme is available. It is SEIS’s “bigger sister”, if you like and works in a similar way. Companies can raise up to £5,000,000 under the EIS scheme.
Any one individual investor can invest up to £1,000,000 per person per year in qualifying companies. Initial income tax relief is 30% of the value of the money invested. An added benefit is that EIS has a 'carry back' facility which allows for investments to be applied to the preceding tax year.
Did you know that?
Investors IRRs grew to 42% when factoring in SEIS/EIS investment relief. This is 3x greater than the average IRR of 14% excluding the impact of SEIS/EIS, (Source: Seedrs, Sep 2016).
HMRC underwrites up to 72.5% of the invested sums through income tax reliefs for investors… and up to 100% of the investment could be underwritten with capital gain reliefs.
If the right conditions are met, there will be no tax to pay at exit.
Scenario 1: No SEIS/EIS and Successful Exit after 3 years
Scenario 2: SEIS/EIS and Successful Exit after 3 years
Scenario 3: No SEIS/EIS and Loss-making Investment
Scenario 4: SEIS/EIS and Loss-making Investment
5 way investors can obtain SEIS / EIS Tax Relief
1. Initial investment
Income Tax relief is 50% (SEIS) or 30% (EIS) on the amount invested up to a maximum of £100k for SEIS and £1m for EIS per individual in a tax year.
- If your investor invests £100k then under SEIS, they save £50k on their income tax or £30k under EIS.
- They claim the income tax relief for the tax year in which the shares were issued, or they can carry back the relief.
- Relief is limited to the extent there is an income tax liability to claim against.
The big one! No CGT to pay if shares are sold more than 3 years after investment.
- If your investor invests £100k in a company and sells the shares 4 years later for £1m, then the £900k gain is tax free.
- This allows for a significant CGT saving of £180k!
If the worst happens and the company does not make it, your investor loses money. The loss on the shares disposed of can be set against your investor's income or capital gains to reduce his/her tax liability.
This is important for limiting losses on the investment.
- Your investor invests £100k into your Start-Up. If the business is wound up, then the investor can obtain £22.5k (SEIS) or £31.5k (EIS) income tax relief on their loss, assuming they are a 45% tax rate payer.
- Their total loss is therefore £27.5k (27.5%) under SEIS or £38.5k (38.5%) under EIS including the income tax relief claimed after investment.
4. Initial investment – carry back
Amount subscribed for shares in SEIS/EIS companies can be treated as if it was made in the tax year before the investment was made.
- If no prior year SEIS investments were made, your investor can invest up to £200k (max £100k per company) with a saving of £100k (£200k at 50%) on their tax bill.
5. Initial investment – Loss relief against income on gains
Investors can claim exemption for 50% of a capital gain realised in a tax year when the proceeds are re-invested in the same tax year in qualifying SEIS / EIS companies.
This will save an investor 10% tax in the case of SEIS (i.e. 50% of the current CGT rate of 20%).
- Your investor has a capital gain of £100k which is taxable at 20% and makes a £100k investment into a qualifying SEIS company. The investor will save £10k in CGT (20% x 50% x £100k = £10k).
Tax Relief from Inheritance Tax
An investment in an SEIS or EIS qualifying company should qualify for 100% relief from Inheritance Tax, so long as the investment has been held for two years and is still held at time of death.
Watch the video, The Case for the New Investor which gives a simple animated description of how SEIS works.
How Ignition Financial Helps Founders
Ignition Financial helps Founders secure SEIS and / or EIS investment status by:
- Advising on structuring, eligibility and pitfalls to avoid before and after you raise capital
- Obtaining Advance Assurance from HMRC by drafting and submitting the application and supporting materials. We then respond to HMRC’s questions.
- Making sure you are compliant and obtaining investor certificates.
To discuss any of this in more detail, please get in touch with Adam Brodie (adam[at]ignition.financial)