What are the rules for SEIS/EIS investors?

What SEIS/EIS investors have to do to keep their tax benefits.

Please note, this article is based on the current eligibility criteria and funding limits for SEIS/EIS. Read here for information on the changes coming to the schemes in April 2023.

 

The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are two government-backed schemes that encourage investment in seed and early-stage companies. 

Investors receive attractive tax benefits should the company they back fail or succeed, while the company itself receives the funds it needs to grow and develop. Win-win. 

Firstly, as an investor, the company you want to invest in must be eligible for SEIS/EIS in order for you to claim the tax reliefs associated with the schemes. Most companies apply for advance assurance (and most investors require it) from HMRC before any agreements are made. So it’s worth asking the company for proof of their advance assurance letter before parting with your cash. 

From the company’s perspective, while advance assurance isn’t mandatory, many investors see it as such – so it’s definitely worth applying for advance assurance to increase your chances of securing investment. 

Here we’ll explain the different rules and conditions investors must meet to claim the tax benefits associated with each scheme (read about the tax benefits for investors here). 

SEIS rules for investors 

Hold the shares for at least 3 years: If you sell any of the SEIS shares within 3 years of receipt, your tax reliefs may be withdrawn or reduced. So to maintain the scheme's full tax benefits, you must hold the shares for at least 3 years. The shares must also be ordinary shares with non-preferential rights to dividends or capital, and paid in full (in cash) upfront. 

Have a UK tax liability: You don’t necessarily need to live in the UK or even be a resident, but you will need a UK tax liability to claim the relief. 

Not an employee or associate of one: You and your associates (i.e. business partners, certain relatives and spouses/civil partners) cannot be employed by the company. It’s not quite as black and white as this, however, as siblings and cousins aren’t considered associates (read here to learn which family members can invest under S/EIS).

But you can be a paid director: You can be a paid director and invest in your own company, as long as you don’t have a ‘substantial interest’ (i.e. have 30% or more of the shares or voting control in the company from the time of incorporation until at least three years after the share issue).  

No related investments: If you have a substantial interest in company X and reach an agreement with the owner of company Y to invest in each other’s companies through SEIS, that would be classed as a disqualifying event and you would lose your tax benefits. 

No linked loans: You and your associates cannot have any loans linked with the company in question. 

No tax avoidance: The investment you make must pose a genuine risk of loss of capital, while the company must use the money to grow and develop. Similarly to the related investments and linked loans conditions above, you cannot devise a plan with the company and its associates to use the investment for the purpose of tax avoidance. 

EIS rules for investors 

EIS rules are slightly different in that the connection between investor and company cannot be as intertwined. This applies primarily when a director wishes to invest in their company. 

But for the most part, the rules for both schemes are pretty similar, with a few caveats which we’ll explain in plain language. 

Hold the shares for at least 3 years: Identical to SEIS, if you sell any of the EIS shares within 3 years of receipt, your tax reliefs may be withdrawn or reduced. So to maintain the scheme's full tax benefits, you must hold the shares for at least 3 years. The shares must also be ordinary shares with non-preferential rights to dividends or capital, and paid in full (in cash) upfront. 

Have a UK tax liability: You don’t necessarily need to live in the UK or even be a resident, but you will need a UK tax liability to claim the relief. 

Not an employee or ‘connected’ with the issuing company: You cannot be an employee of the company you wish to invest in, nor can your associates (see the SEIS condition for more details) for at least 2 years before the share issue (or the company’s incorporation if later). 

Also, unlike SEIS, you cannot be a paid director and receive EIS tax relief, however, you can if you’re an unpaid director. This is also dependent on the director not having a substantial interest in the company (holding 30% or more of the shares or voting rights). 

There are more caveats to this condition, so for full details, read HMRC’s guidance

No linked loans: For at least two years before the share issue (or the company’s incorporation if later), the investor and their associates cannot receive a loan from the company. If the loan was made solely because of the EIS investment, that would be a disqualifying event. 

This condition applies after the investment has been made too (i.e. you cannot receive a loan from the company for at least 3 years after the share issue). 

For full details on this condition, read HMRC’s guidance here

No tax avoidance: As an investor, you have an obligation to make the investment for genuine commercial purposes and not as part of a scheme or arrangement for tax avoidance.

This falls under both the SEIS and EIS ‘risk to capital’ condition the receiving company must meet, where they must spend the money to grow and develop, which presents a risk of loss of capital to the investor. Likewise, the investor must understand how the company intends to grow and develop and see genuine commercial potential in it. 

HMRC doesn’t have any hard and fast rules for the tax avoidance condition, and they judge it on a case-by-case basis. 

Of course, SEIS and EIS provide great tax advantages for investors, but HMRC will make a decision on this condition based on the facts and circumstances around the other conditions, such as whether the investor is associated with the company at all or has any outstanding loans or agreements.  

 

Our team, content and app can help you make informed decisions. However, any guidance and support should not be considered as 'legal, tax or financial advice.'