Enterprise Investment Schemes (“EIS”) and Seed Enterprise Investment Schemes (“SEIS”)

Written by Arnold Hill on November 16, 2016

EIS

Introduction

The Enterprise Incentive Scheme (EIS) is a government initiative designed to encourage investors to undertake investments in small, higher risk, trading companies by providing income tax and capital gains tax reliefs.

Since the EIS was launched in 1993-94, almost 22,900 individual companies have received investment through the scheme and over £12.2 billion funds have been raised.

Overview of the relief

The popularity of EIS funding is primarily based on the tax incentives associated with the scheme. Listed below is a summary of tax reliefs available, for which you may become eligible following an EIS investment;

30% upfront income tax relief (provided your investment is held for at least three years)

  • 100% capital gains tax deferral for the life of the investment
  • 100% inheritance tax relief after two years (provided the investments are held at the time of death)
  • Loss relief on any holdings that are realised at a loss (net of any income tax relief already claimed on those holdings)
  • Tax-free growth (i.e. CGT free exit provided income tax relief was given on the full amount invested and has not been withdrawn)

Qualifying conditions

In order to qualify for the EIS, the criteria must be met by both the company and the investor for the duration of the holding period of three years.

Company

The EIS is not available to all trading companies. There are two main examples of excluded business activities; financial services and property-based trades.

However, for those companies who are eligible the following current qualifying conditions are as follows:

The company is not controlled by another company;

  • The company has fewer than 250 employees;
  • The company has gross assets that do not exceed £15 million before investment[2] , or £16 million after investment;
  • The investment must be into new shares (therefore an investor can’t simply buy existing shares);
  • The investee company uses the money raised within 24 months in the qualifying trade; and
  • Any investment of EIS (or VCT) fund does not exceed more than £5 million in any one company in any one year.

Investor

The investor must not be connected to the company during the holding period. An individual is considered connected to a company if they directly or indirectly possess or are entitled to acquire:

more than 30% of the ordinary share capital of the company or any subsidiary or

  • for shares issued before 6 April 2012, more than 30% of the composite total of the loan capital and issued share capital of the company or any subsidiary or
  • more than 30% of the voting power in the company or any subsidiary, or
  • such rights as would, either in the event of a winding up or in any other circumstances, entitle the individual to receive more than 30% of the assets of the company which would then be available for distribution to equity holders of the company.

 Pitfalls

As with all investments there are risks involved with an EIS that need to be understood before making the decision to invest. It must also be understood that capital is at risk. Both gains and losses are possible and it might be that less than initially invested is received.

The risk associated with smaller businesses is based on their volatility due to higher failure rates than larger established companies.

If the EIS shares are sold before they have been held for three years, any income tax relief claimed will need to be repaid. Therefore, it is best to think of an EIS as a long-term investment, as it could take several years to sell the shares. As the shares are often held in small unlisted companies investors may find it more difficult to find a buyer for their shares. It is also worth remembering that the tax rules are forever evolving and thus HMRC may make changes to the EIS tax relief in the future.

SEIS

Introduction

The Seed Enterprise Investment Scheme (SEIS) started back in April 2012, it is similar to EIS but aimed at investors in small start-up companies.

Qualifying conditions

The key differences between EIS and SEIS are:

  • The company’s trade must be new (carried on for less than 2 years before the share issue;
  • The gross asset value before the share issue must be less than £200,000; and
  • The company has fewer than 25 full-time employees at the date of issue

 The relief available

  • The capital gains treatment is same as for EIS;
  • 50% upfront income tax relief (provided your investment is held for at least three years);
  • Maximum investment of £100,000 in a tax year; and
  • The relief is given in the tax year the shares are purchased but can claim to carry back part of the relief to the previous tax year. No relief is available until the company has spent at least 70% of the funds.

[1] Source: HMRC Enterprise Investment Scheme Statistics, July 2015.

[2] Except in the case of ‘knowledge-intensive’ companies where the limit is 499 employees and £20 million gross assets.

The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice. No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.