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The attractions of EIS and SEIS

As a small business owner, you may have heard of the two main UK government-backed investment schemes; Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). These programmes are designed to help new businesses access capital by providing generous tax relief incentives to those who invest in them. This article from Thompson Jenner will provide an overview of both EIS and SEIS. 

EIS and SEIS schemes have become popular in recent times; both for business owners and entrepreneurs looking to raise finance, as well as being attractive propositions for investors looking for tax advantageous investments.

What are enterprise investment schemes?

EIS and SEIS were established to encourage investment in early-stage firms which typically struggle to raise capital. The rationale behind the initiatives is that their existence benefits the economy by promoting innovation amongst the small higher-risk business community, which in turn drives up productivity, creates jobs and boosts economic growth.

Both schemes have been successful in terms of generating investment in the small business sector. Indeed, the most recent data from HM Revenue and Customs (HMRC) shows that in 2020 – 2021, 3,755 companies raised funds totalling £1,658m through EIS. In the same year, 2,065 companies raised investment funds of £175m through SEIS.

Continuing government support

One of the few announcements to survive the ‘mini-budget’ in September 2022 was the extension to the SEIS tax relief available which is due to take effect from April 2023. The maximum investment amount will rise from £150,000 to £250,000; the annual investor limit will be doubled to £200,000 and the gross asset limit will rise to £350,000.

According to the recent Autumn Statement, ‘The government is committed to ensuring cutting-edge innovative firms have access to finance to invest and grow. The government remains supportive of the Enterprise Investment Scheme and Venture Capital Trusts and sees the value of extending them in the future. The government will also continue to champion institutional investment into innovation so that UK savers can benefit from the growth of high potential businesses.’

Raising money for business owners and entrepreneurs  

EIS and SEIS are venture capital schemes designed to help small or medium sized companies grow by attracting investment on which investors can obtain tax relief when buying and holding new shares, bonds or assets for a specific period of time.

To qualify for EIS, your company (or group of companies if you’re a parent company) may be eligible if at the time of investment, it has:

  • No more than £15m in gross assets
  • Less than 250 employees
  • Been no more than seven years since its first commercial sale.

There’s no minimum, but the maximum amount you can raise in an EIS is £5m each year and a total of £12m in your company’s lifetime. Higher limits may apply if your company carries out research, development or innovation and meets certain conditions.

To qualify for SEIS, your company (or group of companies if you’re a parent company) may be eligible if at the time of investment, it has:

  • No more than £200,000 in gross assets
  • Less than 25 employees
  • Not previously carried out a different trade.

You won’t qualify if you’ve already had investment through EIS or a Venture Capital Trust (VCT). You can receive a maximum of £150,000 through SEIS investments. This will:

  • Include any other de minimis state aid received in the 3 years up to and including the date of the investment
  • Count towards any limits for later investments through other venture capital schemes.

Tax benefits for investors

In essence, both schemes are investment vehicles which offer potential investors tax benefits whilst helping small businesses to raise funds and grow.

Companies qualifying for EIS are small and usually privately owned, although they can be listed on the Alternative Investment Market (AIM). For this tax year, the maximum investment in EIS is £1m (or £2m, provided at least £1m of this is invested in knowledge-intensive companies). EIS benefit from a combination of upfront and ongoing tax advantages:

  • Up to 30% upfront Income Tax relief, provided you hold the EIS for three years
  • No Capital Gains Tax (CGT) on profits after three years
  • No Inheritance Tax (IHT) after two years
  • Tax-free growth
  • Loss relief on exit.

Similarly, SEIS investment provides very significant tax savings when investing in young and small companies that qualify for SEIS status. The difference is that SEIS-qualifying companies are even smaller and younger than EIS-qualifying companies, so are considered riskier. To help compensate for the additional risk, the government has made the associated tax reliefs even more generous: 

  • Up to 50% Income Tax Relief, provided you hold the SEIS for three years
  • No CGT on profits after three years
  • Up to 50% CGT relief from other investments 
  • No IHT after two years
  • Tax-free growth
  • Loss relief on exit.

Providing attractive tax-efficient investment opportunities

A key benefit associated with both schemes is obviously the tax benefits they enjoy. This has increasingly come to the fore as tax advantages afforded to other investments, notably pensions, have been squeezed. As a result, EIS and SEIS investment are increasingly recommended to those who may be close to breaching pension allowances but still want to save in a tax-efficient way for their retirement.

These schemes are more than mere tax tools though as they provide important investment diversification benefits too. The types of investments held in such schemes inevitably mean they have low correlation to mainstream pension and Individual Savings Account (ISA) products which typically invest in larger firms. This makes them an appealing proposition for investors seeking greater investment diversification.

However, since these schemes invest in small, fledgling, and therefore typically more fragile enterprises, they are generally considered to be suitable only for investors who are comfortable holding high-risk investments and where they are a relatively small proportion of an investor’s overall portfolio. It’s important to obtain professional financial advice when considering such investments.

Both schemes undoubtedly remain an attractive proposition for experienced investors looking to maximise tax-efficiency and diversify their portfolios.

How we can help

Thompson Jenner can help businesses and investors alike. For businesses, we can make the whole process hassle free by helping you to make sure that your company is ready for EIS or SEIS. This includes making an Advance Assurance application where applicable and liaising with HMRC. For investors, we can help you to claim the reliefs on your tax returns.

So, please do get in touch – we have a dedicated team with the expertise and specialist skills required.

Hopefully, this overview has given you a better understanding of how EIS and SEIS schemes could benefit you. Look out for our next monthly article which will be on innovate funding, grants and grant audits.

For further information or to discuss the contents of this article, please contact Jon Westley