Looking at investment incentives – EIS and SEIS
A lot of start ups, creative, new media and tech companies find it hard to attract investment as they are seen as high risk and that is exactly what they are.
The Governments Enterprise investment scheme also known as EIS and Seed EIS has been put together with this in mind to try to make these companies more attractive to investors by offering some sizeable tax reliefs.
So what’s on offer to an investor?
The Enterprise Investment Scheme (EIS)
There are 4 main tax reliefs and if you are earning a lot of money then the effect of all of them together can save you a lot of tax:
Income Tax Relief – Individuals subscribing for new shares can claim up to 30% income tax relief on the amount of their investment up to a maximum investment of £1 million, in the year of investment or the previous year (there is no longer a minimum investment level).
Capital Gains Tax (CGT) Exemption – Where income tax relief has been received and the shares are held for at least three years, any gains on disposal are entirely free from Capital Gains Tax.
Loss Relief – If shares are disposed of at a loss, subscribers can elect for the amount of the loss, less any income tax relief previously given, to be set against income for the year of disposal or the previous year, rather than being restricted to using such losses against future capital gains only.
Capital Gains Tax Deferral Relief – The payment of tax on a capital gain can be deferred where the gain is invested in shares of an EIS qualifying company. The gain can arise from the disposal of any kind of asset but the investment must be made within the period of one year before and three years after the gain arises.
There are of course criteria the company must satisfy, the main criteria being:
- They must be unquoted and independent;
- Have gross assets of less than £15 million before the share issue (with a cap of £16 million post investment);
- Have fewer than 250 full time employees;
- Carrying on a “qualifying trade”. Most trades will qualify but HMRC have listed some exceptions so individual advice must be taken.
A company can raise up to a total of £5 million in any 12 month period, this can be under EIS, Corporate Venturing Scheme (CVS) and Venture Capital Trusts (VCT). The main condition in this area is that the funds raised must then be used in the trade within two years of the share issue.
The Seed Enterprise Investment Scheme (SEIS)
Even more risky than small tech companies are start ups, it is thought that on average 1 in 3 fail. So if you wish to invest here and take the added risk the deal is even sweeter as Seed EIS offer 5 tax saving opportunities:
Income tax relief at 50% of the amount invested in the Investee Company in the year of investment subject to an annual investment limit of £100,000 (irrespective of your marginal tax rate);
Tax free capital gains when SEIS Qualifying Investments are sold; where income tax relief has been received and the shares are held for at least three years.
Capital gains tax exemption on any chargeable gains realised which are re-invested in SEIS Qualifying Investments; up to half of the amount reinvested.
Inheritance tax relief provided the investments have been held for two years and are held at the time of death;
Loss relief which can be taken against income or as a capital loss.
If all of the tax aspects are combined, an investor has the opportunity to make a £100,000 investment at a cost of only £22,000!! That is a good investment…. if you can stomach the risk obviously.
Similar criteria apply such as:
- They must be unquoted and independent;
- Have gross assets of less than £200,000 before the share issue;
- Have fewer than 25 full time employees;
- Have no venture capital investment in place;
- Must have traded for less than 2 years.
However, the funding cap for SEIS is much smaller with only £150,000 allowed in a 12 month period.
For both EIS and SEIS there are restrictions on who can invest and benefit from the tax reliefs, if you are an ‘Unconnected’ shareholder then you should be entitled to all benefits, but if you are ‘Connected’ – you are an employee or Director or hold more than 30 % financial interest in the company then the income tax relief and CGT exemption will not be available to you.
(This excludes business angles – they will not be classed as ‘Connected’)
So….Make your investment as attractive as it can be.
If you are a company looking for investment it’s well worth finding out if you meet the criteria for EIS or SEIS, as it will give your company an appealing investment edge.
Also, if you think you qualify for EIS then HMRC offers an advance assurance facility, which allows companies to check in advance of an issue of shares whether the company is likely to satisfy the qualifying conditions or not.
Examples of both EIS and SEIS can be found on the Revenue website.
Seek professional advice before you do anything
EIS and SEIS are specialist tax areas and advice should always be obtained before any investment is made.
So speak to your accountant – or to me!