The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are both part of the UK government’s initiative to encourage investment in small and medium businesses. The idea is to help SMEs raise funds to grow the business by offering investors tax relief on the finance they provide.
With similar names and objectives, it’s easy to see why some might be confused as to the differences between the two schemes. Here we explain the eligibility for each as well as benefits to the small business owner and to investors.
The eligibility criteria
Both schemes are for companies that are not quoted on a recognised stock market and investment is in exchange for shares in the business. You can still be eligible if your company is listed on a stock exchange designed for smaller companies, such as AIM or ISDX.
EIS is the original initiative, introduced in 1994 for businesses that are less than seven years old and have less than 250 employees. There is also a cap on gross assets of £15million.
SEIS was introduced in 2012 for even smaller companies in their early stages (under two years old with less than 25 employees) that have up to £200,000 in gross assets.
The differences between EIS and SEIS
SEIS – A business can get funding of up to £150,000 through this scheme, which includes any other de minimis state aid received within three years of investment.
Investors receive significant tax relief to encourage this high risk activity. In fact it can equate to benefits of up to £100,000 each tax year. This includes
- 50% Income Tax relief against the investment amount.
- Exemption on Capital Gains Tax (CGT) on any profit from the sale of shares after three years of investment.
- 50% write-off of CGT on the investment amount in the same tax year.
- Any loss when sold can be offset against Income Tax or CGT.
- Relief can be carried back to the previous year of investment.
- Usually shares from this investment are exempt from inheritance tax (IHT), as long as they are held for more than two years.
EIS – A business can attract investment of up to £1 million per year through EIS. This scheme is aimed at individuals that are willing to commit to a higher capital amount. Tax advantages for investors include:
- Exemption on CGT for any profit made from the sale of shares after three years of investment.
- Up to 100% of the investment can be deferred against any CGT for up to one year before or three years after sale.
- Any loss when sold can be offset against Income Tax or CGT.
- Relief can be carried back to the previous year of investment.
- Usually shares from this investment are exempt from IHT free, as long as they are held for more than two years.
The benefits to smaller businesses
As a small or medium business, finding the investment capital to expand can be hard and the tax relief advantages of both schemes can be an attractive incentive to potential shareholders.
It is important to remember that to be eligible for tax advantages under either of the schemes, an investor cannot be connected to the business – i.e. a partner, employee or director – and the total stake an investor can hold is no more than 30%.
Assuming your business is eligible, you can offer both SEIS and EIS to potential investors but usually you would choose to raise funds under SEIS first, and you cannot issue shares under both initiatives on the same day. It is also up to the business which investors fall under which scheme.
Business owners should also consider that your company must have been trading for more than four months or spent 70% of the capital raised under SEIS before applying for full SEIS clearance.
The benefit to investors
While investing in a small business is risky, joining in the early days means there is the potential to receive a much higher return on investment than buying shares in an established company.
EIS and SEIS make the opportunity much less risky as tax relief means individuals can claw back a significant percentage of the investment.
However, there is the draw back that if a company is unlisted, it is much harder to sell your shares.
Support through the process
If you are considering setting up SEIS or EIS for your new business, or want to invest your capital in a start-up under one of these schemes, we can help talk you through your options and the process.
Contact us to discuss your circumstances.
AJN Accountants are specialists in helping contractors, freelancers and small businesses to save tax and time.
Please contact us for more information:
E: info@ajnaccountants.co.uk
T: 020 3866 8951
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