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.
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.
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.
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.
The big one! No CGT to pay if shares are sold more than 3 years after investment.
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.
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.
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%).
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.
Ignition Financial helps Founders secure SEIS and / or EIS investment status by:
To discuss any of this in more detail, please get in touch with Adam Brodie (adam[at]ignition.financial)