Looking for people to invest in your business? If you can make your investment opportunity SEIS and EIS compliant, you’ll be offering potential investors the chance to benefit from very generous tax incentives. Here’s what you need to know…

SEIS and EIS – the Seed Enterprise Investment Scheme (SEIS)

SEIS is for smaller companies. If you have fewer than 25 staff, are less than 2 years old, and have less than £200,000 in gross assets, your business can qualify under the scheme.

SEIS shares are also exempt for inheritance tax as long as your investors have owned the shares for two years or more.

There’s a cap of £100,000 worth of investment into SEIS schemes a person can make within one year.

SEIS and EIS – income tax relief for SEIS investors

Let’s say that you’ve set up a brand new online start-up offering the latest fashionwear on mobile phones, “FVictim”.

Any investor putting their own money into it would get 50% income tax relief on their investment. So, if your investor put £15,000 of his or her own money into your SEIS-qualifying investment, they could deduct £7,500 from their income tax bill as long as they keep their shares for a 3-year period.

What if your investor had only paid £5,000 income tax in that year? They could claim all of that £5,000 back but they wouldn’t be able to claim the remaining £7,500.

For your investor to claim, they must do so within 5 years after the 31st January following the financial year that they put their money into your company. They can also take the option to treat the shares in your business as having been issued in the previous financial year to use up any income tax relief they’re entitled to from that period.

Burton Beavan note – income tax relief is not applicable to your investor if they own more than 30% of your company’s share capital or voting rights.

SEIS and EIS – SEIS capital gains tax (CGT) exemption relief

Your investor also has the option of deferring 50% of their CGT up to the amount of their investment.

Your investor has put in £15,000 into FVictim. So, their CGT exemption will save them £2,100 in tax. This is because CGT for additional rate taxpayers is at 28% and 28% of £15,000 is £4,200. 50% of that £4,200 is £2,100.

CGT is 10% for basic rate tax payers means they can claim back £750. CGT for higher-rate tax payers is 20% so the relief would be £1,500.

If your investor disposes of the SEIS shares, ceases to be a UK resident, or the SEIS shares cease to be eligible within three years of their investment, the exempted CGT will have to be paid back to HMRC.

SEIS and EIS – SEIS capital gains tax (CGT) exemption

If, for whatever reason, your investor in FVictim loses the belief and disposes of his or her shares within three years of purchase, they can claim exemption from CGT for the shares which they could initially claim income tax relief on.

In cases where income tax relief was not given on the full amount your investor put in, they can claim the proportionate gain back with their CGT exemption.

SEIS and EIS – relief for losses with SEIS

Let’s say that FVictim didn’t make it, leaving disappointed investors nursing their losses. One of the major attractions of SEIS is that if your investor’s losses are greater than the amount they claimed in income tax relief, they can benefit from even more tax relief at the rate they pay income tax at.

How would this £15,000 loss look at SEIS relief for basic, higher, and additional rate tax payers?

Let’s now look at SEIS’s big brother, EIS.

SEIS and EIS – the Enterprise Investment Scheme

What are the big differences between SEIS and EIS? Mainly, it’s down to scale.

Individual investment in SEIS schemes are capped at £100,000 a year. For EIS schemes, that figure is £1,000,000.

Burton Beavan note – in addition, after being invested for two years, an investor’s EIS investment qualifies for Business Property Relief and thereby becomes exempt from inheritance tax.

For EIS, the company may have up to 250 staff, be listed (although not on a major stock exchange) and have gross assets pre-investment of £16,000,000.

Burton Beavan wealth warning – as with SEIS, EIS investments are illiquid, even if listed on a non-major exchange. Selling your shareholding at any point may be exceptionally difficult and in times of low demand, the value of your investment may drop through the floor.

So, what incentives are there for investors with EIS?

SEIS and EIS – income tax relief for EIS investors

Let’s consider the investment landscape for “Eurovision Forever”, a mobile app which deliver direct to users’ phones 6 different radio stations based upon Eurovision song contest entries segregated by decade.

Now, don’t get your hopes up. This investment does not yet exist but let’s pretend it does! 😊

Income tax relief is set at 30%. So, if your investor put £150,000 into Eurovision Forever, they’d be able to claim back £45,000 in income tax for the year in which you made their investment.

As with SEIS, if your investor paid less than £45,000 in the year of investment, they would only be able to claim up to the amount of income tax they actually paid. Also, if your investor has more than 30% of their shares or voting rights two years before EIS shares were issued and ending three years after their issuance, income tax relief cannot be claimed. Your investor may not be employed by the company (or its parents or subsidiaries) in any capacity, including as a director.

Burton Beavan heads-up – EIS investor involvement is based around the complicated notion of “connectedness”. Before you or your investor commits, please talk to us about what you want and we’ll give you our professional opinion.

SEIS and EIS – EIS capital gains tax (CGT) deferral relief

It’s possible for your investor to defer CGT on the disposal of their shareholding if they make their EIS investment in a period that starts one year before and ends there years after they benefited from their gain.

As with SEIS, if your investor disposes of their EIS shares, they cease to be a UK resident, or the EIS shares become ineligible for the scheme, HMRC will want your investor’s money back.

Burton Beavan tax tip – please take to us about how to minimise tax with these types of investments as this is one of the few times that deferment of tax may actually work to your detriment.

SEIS and EIS – EIS capital gains tax (CGT) exemption

Your investor can claim exemption from CGT for shares which qualified for income tax relief. They need to hold onto their shares for three years minimum however.

And if income tax relief was not given on the full amount your investor put in, they can claim a proportion of that gain back with their CGT exemption.

SEIS and EIS – relief for losses with SEIS

Sadly, Eurovision Forever didn’t really get close to their two million subscribers they had needed to provide a return for investors. They had big trouble getting their subscriber base past 2,000 and had to shut up shop.

As with SEIS, there is tax relief that its investors can use to mitigate much of their losses and shown here –

SEIS and EIS – get in touch with Burton Beavan

We work with tech start-ups and help with management accounting for growth. Our MD, Gareth, is also a veteran of Silicon Valley and has seen many a deal done with both angels and VC funds.

We can help you structure your business for both SEIS and EIS investment. To find out how, please call us on 01606 333 900 or email hello@burtonbeavan.co.uk.