SEIS & EIS Explained

Home > entrepreneurs > SEIS & EIS Explained

The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are government initiatives offering some of the most attractive tax breaks available in the UK.

The Enterprise Investment Scheme (EIS) provides tax incentives in the form of a variety of income tax and capital gains tax reliefs to investors who invest in smaller, unquoted, trading companies.

The Seed Enterprise Investment Scheme (SEIS) was introduced in April 2012 by HMRC to help small, early-stage companies raise funds through individual investors by providing a series of tax reliefs on investments made into qualifying companies.

Enterprise Investment Scheme (EIS) tax breaks

The UK government set up the Enterprise Investment Scheme in 1994. Today, it offers many tax breaks to investors who buy shares in small, private companies, including income tax relief of 30 per cent.

So, how do EIS investments work? Below is an example breakdown of two different scenarios for an EIS investment. To keep things simple let’s assume you invest £10,000 and pay income tax at the 45% rate.

EIS Investment

Case 1: The company is bought out and your shares triple in value
Investment = £10,000
Income Tax Relief = £3,000 (you get 30% of your investment back as a tax bill reduction)
Capital Gains Tax = £0
Profit from sale = £23,000

Case 2: The company fails, and your shares hold no value
Investment = £10,000
Income Tax Relief = £3,000 (you get 30% of your investment back as a tax bill reduction)
Capital at risk = £7,000
Loss relief = £3,150 (45% x capital at risk)
Your actual loss = £3,850 (£10,000 – [£3,000 + £3,150])

YOUR INVESTMENT RISK HAS BEEN MITIGATED BY 61.5%

Aside from no capital gains to pay on profits made from EIS shares, there is also no inheritance tax to pay on such shares.

To be eligible for EIS reliefs, you must hold the shares for at least three years before selling them. There’s a few more catches. You still have to pay tax on any dividends – but most small private companies won’t pay dividends anyway. There are certain restrictions as to what kind of business you can invest in (it can’t be a bank, a property company, farm or a nursing home, for example). And you can’t be connected to the company or have a stake of more than 30 per cent of it. You can invest a maximum of £2 million each year through EIS.

Seed Enterprise Investment Scheme (SEIS) tax breaks

The Seed Enterprise Investment Scheme is much newer than its parent initiative, EIS, having been set up as recently as 2012.

It is very similar to EIS but designed for investing in even smaller companies, providing even more generous tax breaks.

While the maximum workforce and gross assets allowable under EIS are 250 staff and £15 million respectively, SEIS has lower limits of 50 staff and £200,000 gross assets. Businesses must also be less than two years old (there are no age restrictions under EIS).

The tax breaks are as follows:

Income tax relief is 50 per cent, not 30 per cent. So, you get £5,000 off your income tax bill for investing £10,000 under SEIS.

As with EIS, there’s no capital gains tax to pay on profits, no inheritance tax, and you can claim loss relief in the same way. See above for details.

There is an extra relief called capital gains reinvestment relief. This is useful to you if you have recently paid capital gains tax on other investments. You can reclaim up to 50 per cent of the tax paid if you reinvest that money into SEIS.

The maximum you can invest through SEIS in any tax year is £100,000.

Both schemes offer outstanding incentives and risk mitigation for investors who wish to get involved in early-stage companies.

HMRC’s website provides a great summary of both schemes. You can read up about them by clicking on the following links:

https://www.gov.uk/seed-enterprise-investment-scheme-background
https://www.gov.uk/government/publications/the-enterprise-investment-scheme-introduction

Ready to take the next steps and raise funds for your business?

Click the button below to find out if you’re eligible!

Start Raise >

Top