What is EIS/SEIS relief?
The SEIS (Seed Enterprise Investment Scheme) and EIS (Enterprise Investment Scheme) are designed to encourage individuals to invest money in shares issued by qualifying companies.
The SEIS scheme is specifically aimed at start-up companies and companies in their first two years of trade. There is income tax relief available to a qualifying investor equal to 50% of the total investment.
The EIS scheme is available for larger investments or if the company has been active for longer than two years. The income tax relief available to a qualifying investor is equal to 30% of the total investment.
What is it, what are they key benefits and who can claim?
- Income tax relief based on the value of the investment at 30% or 50%, which is deductible in the year of investment or carried back to the previous tax year.
- Gains on disposals of SEIS/EIS shares sold after three years can be exempt from capital gains tax.
- Capital losses are potentially available to utilise against income.
- There is the possibility to defer capital gains by investing the proceeds in to SEIS and/or EIS shares.
- Potential Inheritance Tax Relief.
Who is exclude from being a qualifying investor?
- There must not be a connection with the issuing company for EIS which would include not having any existing shareholding except in specific circumstances.
- SEIS has various conditions to meet but employee investors are specifically excluded.
- There must be no linked loans from the company to the investors.
- Care must be taken for three years from the date of the share issue to ensure the investor does not receive any value from the company.
- The conditions must be monitored for a three year period after the date of the share issue and if any conditions are no longer met then a notice must be provided to HMRC within sixty days. If this is the case some or all of the income tax relief previously given will be clawed back.
- Maximum investment per investor of £100,000 applies under SEIS and £1m under EIS.
What is a qualifying company?
- A maximum investment of £100,000 applies under SEIS in the three years following the share issue. The total amount that can be raised under relevant investments in a rolling twelve month period is £5m (this includes SEIS and EIS).
- Note that EIS shares must be issued within seven years of the first commercial sale which is made by the company.
- Maximum risk finance investments at issue date for relevant investments (SEIS, EIS, SITR) is £12m, increasing to £20m for knowledge intensive companies. A knowledge intensive company must meet:
1. Operating costs condition and either
2. The innovation condition; or
3. The skilled employee condition
- The maximum number of full time equivalent employees should be less than 250 (knowledge intensive company less than 500).
- The company must not be in financial difficulty at the date of the share issue.
- The company must be carrying on a qualifying trade. Note there is a list of excluded activities for both SEIS and EIS.
- There are complications for group situations, including gross asset requirements and employee number limits for both reliefs.
- Strictly not a company qualification but care must be taken on how the money raised is utilised with a two year time limit for EIS and a three year limit for SEIS.
How can DSG help?
At DSG, we have a team of tax professionals who can review whether your business is a qualifying company for either of the tax incentives.
We can also work with you to determine if the investor will meet the stringent conditions, and, if not, suggest alternative ways to structure the investment.
We can then guide your company through both the advance assurance process pre-investment and the full application process post-investment.
The tax incentives for both schemes require HMRC approval from the Small Companies Enterprise Centre.
For a free initial consultation and to discuss your needs contact one of our specialist team.