- What & why? - The Seed Enterprise Investment Scheme and the Enterprise Investment Scheme (EIS) encourage innovation and help businesses raise funds through the provision of tax reliefs.
- SEIS - Offers an individual income tax break of 50% of the amount invested, is only available to individuals not organisations and only up to £100,000 per tax year can be claimed for relief.
- EIS - Allows an individual to invest up to £1 million per tax year, however, income tax relief is only 30% of the value of investment.
- Capital gains - Both SEIS and EIS offer individual exemption from capital gains and inheritance tax on earnings from shares.
- Loss relief - Loss relief is available if the company fails or if shares are eventually sold at a loss. This is achieved by offsetting such losses against capital gains tax.
The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are two initiatives introduced by the UK government to encourage innovation and help small, early-stage businesses raise funds from individual investors through the provision of a series of tax reliefs on investments made into qualifying companies.
This is achieved by awarding tax relief to private investors when they invest in SEIS and EIS qualifying companies under the scheme.
In order to obtain SEIS or EIS investment, any capital raised by a company must be used for a ‘qualifying business activity’ for example, research & development, hiring, marketing or product development.
Whilst similar, there are some key differences between the two schemes.
SEIS relief applies only to individuals and not companies or trusts.
The SEIS allows an individual to claim relief on investments made through the SEIS of up to £100,000 per tax year, in return, receiving an individual income tax break of 50% of the amount invested.
The scheme also offers the individual exemption from capital gains on earnings from shares, with any profits realised from the sale of shares after three years benefitting from a capital gains tax exemption. Moreover, no inheritance tax needs to be paid on shares held for at least two years.
Loss relief is also available if the company fails or if shares are eventually sold at a loss, even if within the three-year hold period. This is achieved by offsetting losses against capital gains tax. The loss relief that can be claimed is at the equivalent rate to the highest rate of income tax that is paid by the investor.
To qualify for relief under the SEIS, the individual investor can not be connected to the company in any significant financial or employment interest. For example, they cannot be a paid Director or Partner and they must not hold more than 30% of the company’s overall shares.
Shares issued under the SEIS scheme must be new shares with no special rights attached to them and the investor must hold the shares for a minimum of three years, otherwise they will be subject to relief clawback. To be eligible for income tax relief the shares must also be paid for in full and in cash, they cannot be bought using a loan approved solely for the purchase of said shares and the money invested must pose a risk of loss to capital.
The EIS allows an individual to invest substantially more than the SEIS (up to £1 million per tax year) however, the investor can claim back only 30% of the value of their investment in the form of income tax relief - a smaller income tax break than the 50% given under the SEIS.
Nevertheless, as with the SEIS, the investor pays no capital gains tax on any profits arising from the sale of the shares obtained through the EIS after three years and no inheritance tax is paid on shares held for at least two years.
Furthermore, like the SEIS, loss relief is available if the company fails or if shares are eventually sold at a loss. This is achieved by offsetting such losses against their capital gains tax. The loss relief that can be claimed is at the equivalent rate to the highest rate of income tax that is paid by the investor.
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