The different tax benefits for each scheme and what investors have to do to keep them.
As of April 6 2023, the eligibility criteria for SEIS has increased to encourage more startups to apply for the tax-advantaged scheme, and annual funding limits for investors have increased too. This guide has been updated with the new changes.
To encourage investment in small businesses and seed companies, the government introduced two tax-advantageous schemes that incentivise investors to back these often ‘riskier’ companies by lowering their at-risk capital.
The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are designed to help companies under two and seven years old respectively get the investment they need to grow and develop.
There are a few rules for investors under SEIS and EIS that you must follow to maintain your tax benefits, but granted you follow these rules and hold the shares for at least three years, the tax reliefs and incentives come at various stages throughout your time as a shareholder.
SEIS/EIS Income Tax relief
Upon receiving the shares, you can claim Income Tax relief on the tax year you make the investment or the tax year before you make the investment (if you choose to treat some or all of the investment as being made in a previous year).
Under SEIS, you can invest up to £200,000 in SEIS-eligible companies each tax year, and claim up to 50% of this back through Income Tax relief.
Under EIS, you can invest up to £1 million in EIS-eligible companies (this increases to £2 million if at least £1 million is invested in knowledge-intensive companies), and claim up to 30% of this back through Income Tax relief.
It’s worth noting that you can only claim relief against the amount of UK Income Tax you need to pay, and you cannot forward any unused Income Tax relief to future tax years.
SEIS/EIS Capital Gains Tax exemption
Under both SEIS and EIS, when you sell your shares, you’ll pay no Capital Gains Tax on any share profits, as long as:
- You hold the shares for a minimum of three years
- You’ve received Income Tax relief on that investment which has not been reduced or withdrawn at a later date
While investing in companies under SEIS/EIS can reduce your tax bill, the incentive isn’t there just to hedge your bet. The schemes also provide lucrative opportunities should you invest in a successful business.
EIS loss relief
If you sell your EIS shares at a loss, you can choose to set the loss amount, minus any Income Tax relief already given, against your income. You can do this for the tax year that you sold the shares or the tax year before.
Tax relief on previous investments
You can defer or even reduce your Capital Gains Tax liability from one asset sale if you use all or part of the gain to fund your SEIS/EIS investment.
EIS Capital Gains Tax deferral relief
If you sell any asset and owe Capital Gains Tax, you can defer some of the amount due if you invest the gains in a company that qualifies for EIS.
You must make the EIS investment between one calendar year before and three calendar years after you sell the initial asset, and this deferral is limited to up to £1 million.
SEIS reinvestment relief
When you sell any asset and use all or part of the gain to invest in a company that qualifies for SEIS, you can reduce your initial Capital Gains Tax liability by up to 50%, up to a total of £50,000. You must also claim Income Tax relief on the SEIS investment.
You don’t necessarily have to sell the initial asset before you invest under SEIS, but if you do, the asset must be sold in the same tax year that you claim Income Tax relief on the SEIS investment.
Tax relief for directors
Things get a little more complex when directors invest in their own companies under SEIS and EIS.
Directors that have invested in their own company under SEIS can claim tax relief. Whereas under EIS, only unpaid directors can claim tax relief, unless the payments made are ‘permitted payments.’
If you become a paid director after making the investment, you can keep any Income Tax relief you previously received. You can also claim tax relief under EIS after becoming a paid director if either you were:
- Issued shares before you became a paid director, and any new shares are issued within either 3 years of the original share issue or the date the company started trading.
- Issued with SEIS shares while you were a paid director of the company, and the new EIS share issue is within 3 years of the SEIS share issue.
Of course, this is dependent on the directors (paid or unpaid) not having a substantial interest in the company (30% or more shares or voting control) before or after the investment.
All the tax reliefs mentioned in this article depend on the investor and company meeting the other conditions associated with each scheme. This includes any conditions that need to be met before the investment is made and while the shares are being held for the minimum three-year period.
For full details, read HMRC’s guidance on tax relief for investors.
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