Use our SEIS & EIS eligibility checker to see if your business fits the bill before applying.
What is the Seed Enterprise Investment Scheme?
Want to raise money for your startup? The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) could be just what you need.
Guy Kaufman is an Equity Consultant at Vestd.
You'll find everything you need to know about SEIS and EIS, including how to apply and ensure your application has the best chance of success, in this guide.
What is the Seed Enterprise Investment Scheme and the Enterprise Investment Scheme?
SEIS and EIS are government initiatives that were created to encourage private investors to invest in fledgling UK businesses.
They’re designed to reduce the risk that comes with investing in any early-stage company by giving investors generous tax breaks.
We’ll dive into the details later, but SEIS and EIS tax incentives include:
- Income tax relief (50% on SEIS investments and 30% on EIS).
- Any profits that come from the sale of SEIS and EIS shares after three years are exempt from Capital Gains Tax.
- Inheritance tax doesn’t apply to SEIS and EIS shares held for at least two years.
- If SEIS and EIS shares are sold at a loss, investors can offset the loss against their Capital Gains Tax.
What’s the difference between SEIS and EIS?
SEIS is designed for startups in their early years whereas EIS is for slightly more established companies. Even if you fall within one of these categories, there are a few more boxes you’ll need to tick (which we'll come onto shortly).
SEIS is for early-stage startups and EIS is for scaleups.
SEIS and EIS both make investing in startups and scaleups a far more appealing prospect for investors because of the tax benefits. Investors who put money into your startup through these schemes will get a tax break on the money they invest.
The big difference for investors is the amount of income tax relief they receive through the two schemes.
- As of April 2023, investors receive a 50% tax break on up to £200,000 they invest through SEIS every tax year.
- Investors receive a 30% tax break on up to £1 million they invest through EIS every tax year (rising to £2 million if they invest in KICs).
It’s therefore well worth making SEIS shares available to investors before you start taking on EIS funding, as it makes your company a much more attractive prospect to investors.
If you want to raise more than the SEIS limit of £250,000, you can always start taking on EIS investment once you’ve hit the SEIS funding limit.
Is my startup eligible for SEIS and EIS?
The UK government announced changes to the SEIS scheme which came into effect in April 2023. Though the changes aren't expected to become law until July 2023. The SEIS eligibility criteria detailed below is based on the new rules.
Your company is probably eligible for SEIS if:
- Incorporated in the UK.
- It's been trading for less than three years.
- It's not trading on a public stock exchange.
- It has fewer than 25 full-time employees.
- It has less than £350,000 in gross assets.
- It hasn’t already taken any EIS investments.
- It's never received investment from a venture capital trust.
- It's not in control of another company that isn’t a qualifying subsidiary.
- It's not and has never been under the control of another company.
If your company fits the criteria, you can receive a maximum of £250,000 in funding through SEIS.
So how does EIS differ?
Your company is more than likely eligible for EIS if:
- It's permanently established in the UK.
- It’s been trading for less than seven years (although in some situations you can still apply).
- It has fewer than 250 full-time employees.
- It has less than £15 million in gross assets.
- It's not trading on a public stock exchange.
- It doesn’t control another company (other than qualifying subsidiaries).
- It's not under the control of another company, nor does another company own more than 50% of its shares.
- You don't plan on closing after completing a project (or series of projects).
If your business qualifies, it’s eligible for a £12 million* investment through the EIS scheme – rising to £20 million if you’re a knowledge-intensive company (KIC).
*Capped at £5 million per year. This £12 million total includes money raised through SEIS, other venture capital schemes, social investment tax relief, and certain types of state aid.
Your business also needs to carry out what HMRC calls a “qualifying trade” to qualify for SEIS and EIS, which the vast majority of startups do. You're good to go as long as the following trades account for less than 20% of your business:
- Coal or steel production
- Farming or market gardening
- Leasing activities
- Legal or financial services
- Property development
- Running a hotel
- Running a nursing home
- Generation of energy
- Production of gas or other fuel
- Exporting electricity
- Banking, insurance, debt or financing services
You'll find more information about SEIS and EIS eligibility in our free guide.
What's the catch?
The money you raise through SEIS and EIS comes with a few conditions.
Firstly, you can only spend the funds you raise through these schemes on either:
- Expenses that are going to help grow your company, like hiring new employees or marketing your business.
- Research and development that’s going to help you grow your company down the line, like developing a new product or researching ways to improve an existing one.
You also need to spend the money you raise through SEIS within three years and the money you raise through EIS within two.
And anyone with 30% or more shares in your company or voting control can’t invest in it through SEIS/EIS.
How do I get SEIS and EIS approval?
You need to get approval from the government to be able to raise funds through its SEIS and EIS schemes.
You should have a good idea of whether you tick all the boxes you need to qualify for SEIS or EIS from the criteria we walked through above.
But investors want to be absolutely certain any money they invest in your company will qualify for tax relief before parting with their cash.
And that’s where SEIS and EIS advance assurance comes in.
What is SEIS and EIS advance assurance?
Advance assurance allows you to check with HMRC to make sure your startup qualifies for SEIS or EIS before you apply.
Getting advance assurance is similar to having a mortgage in principle from a bank before you apply for a mortgage.
It gives the person or organisation lending you money peace of mind.
When applying for advance assurance, you’ll be asked a number of questions about your company, your business plan, and how you’re planning on using the money you’re looking to raise.
HMRC will then take all this information and decide whether your company – and the proposed investment – qualifies for the scheme you’re applying for.
Most SEIS and EIS investors don’t invest unless they have advance assurance.
Investors understandably want a guarantee that they'll receive the tax benefits that come with making a SEIS or EIS investment.
So while you don’t strictly need advance insurance to qualify for SEIS or EIS, you’re definitely going to want to apply for it.
Getting advance assurance will also save you the hassle of applying for SEIS or EIS and then being denied.
How can I apply for SEIS and EIS advance assurance?
You can apply for advanced assurance on the GOV.UK website. Or you can do it through Vestd.
We’ve created an end-to-end advance assurance application that makes applying for SEIS or EIS - and getting the investment you need - as straightforward as possible for startup founders.
We’ll hold your hand through every step of the process, making sure all the i’s are dotted and t’s are crossed before packaging your application up and submitting it on your behalf.
Our guided workflow makes the whole process as painless as possible to ensure that your application has the best chance of success.
And once you've qualified for SEIS and EIS and received investment through the schemes, you can even issue shares and share certificates to investors directly through our platform.
SEIS and EIS advance assurance is free for customers on our Guided plan, or £350 + VAT for customers on all our other plans.
What are the tax benefits for SEIS and EIS investors?
Here’s a rundown of the tax benefits for investors (as long as they stick to the rules).
1. Income tax relief
Backers can invest up to £200,000 per tax year in SEIS-eligible businesses, and then claim 50% of that back through income tax relief. That means they could reduce their tax bill by £50,000 each tax year through SEIS investments.
They can invest up to £1 million in EIS-eligible companies (rising to £2 million if at least £1 million is invested in knowledge-intensive companies) and claim 30% of this back through Income Tax relief. This could allow them to shave £300,000 (potentially rising to £600,000) off their income tax bill.
2. Capital Gains Tax relief
Any profits your investors make when they sell your company’s SEIS or EIS shares are exempt from CGT (as long as they’ve held their shares for three years).
3. Loss relief
Investors can also claim loss relief equal to their income tax bracket on any money they lose by investing in a company through SEIS or EIS.
For example, if someone who pays 45% income tax invests £10,000 in your company through SEIS, they’ll immediately receive £5,000 of income tax relief.
If your company folds while they still hold those shares, they’ll also get to claim 45% (£2,250) of their remaining £5,000 of at-risk capital back as tax relief.
So, after the £5,000 of income tax relief and £2,250 of loss relief, a £10,000 SEIS/EIS investment into a business that fails is reduced to a total loss of just £2,750.
4. Capital Gains reinvestment relief
50% of capital gains are exempt from CGT if they’re re-invested in a SEIS/EIS-eligible business.
For example, if an investor sells a property and realises a £100,000 gain, they’d usually have to pay 28% (£28,0000) Capital Gains Tax on that profit.
If they invest that £100,000 straight into SEIS/EIS-qualifying shares, the CGT they have to pay on that profit will be halved to £14,000.
Who can invest under SEIS and EIS?
Except for certain family members, almost anyone can invest under SEIS, providing that:
- They hold the shares for at least 3 years.
- They have a UK tax liability.
- They're not an employee or associate of one (though they can be a director).
- They have no related investments.
- They have no linked loans.
- It's not for the purposes of tax avoidance.
- They don't own 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.
The investor rules for EIS are a little more complicated. See this article for full details.
What about friends and family?
Opening up SEIS or EIS shares for your nearest and dearest to take advantage of during a “friends and family” funding round can give them an opportunity to take advantage of some generous tax incentives while helping you realise your dream.
- Spouse or civil partner
- And grandchildren
Cannot invest in your startup through SEIS or EIS - and neither will anyone with 30% or more shares in your company or voting control.
- Aunts and uncles
- Nieces and nephews
- And friends
Can (as long as they aren’t an employee or hold more than 30% of the company).
Get funds to fuel your startup
If you’re thinking of launching a funding round, applying for SEIS and EIS is a no-brainer.
With SEIS and EIS, you'll get the cash injection your startup needs, and in return, investors benefit from generous tax breaks when they buy your shares. It's a win-win!
So get cracking and apply for SEIS and EIS advance assurance.
If you’re already a Vestd customer, you can find SEIS/EIS in the app navigation. If you're not, why wait? Join today.
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