Investing in EIS and SEIS companies

The information below is strictly limited to the tax implications of such investment schemes. You should always seek advice from an independent financial advisor before making any investment.

What is EIS and SEIS?

Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are schemes designed to encourage individuals to subscribe for new shares in qualifying companies. By doing so, they can obtain income tax, capital gains tax (CGT) and inheritance tax reliefs. Whilst each scheme shares similar benefits, there are unique aspects to each one.

With regards to the term ‘scheme’, whilst discussions abound on shady tax-avoidance schemes, EIS and SEIS are fully recognised by HMRC and have existed for some time; EIS launched in 1994 and SEIS in 2012.

Why do these benefits exist?  

You’d be investing in new and small companies perceived to be inherently riskier than more established and larger companies. This is why it’s crucial to seek appropriate advice, as you may be putting your capital at greater risk.

What are the tax benefits?

Enterprise Investment Scheme (EIS)

Income tax

A qualifying investor receives a flat rate income tax reducer on any qualifying investment up to an annual limit of £1 million. This is increased to £2 million for knowledge-intensive companies.

A qualifying investor must be unconnected to the company. This includes employees or directors of the company, or those holding more than 30% of the company’s shares.

The tax reducer is calculated as follows:

Investment made (restricted to £1/£2 million) x 30% = tax reducer

Therefore, somebody who invests £10,000 would benefit from an income tax reducer of £3,000.

Capital gains tax

Similarly, providing the shares are held for three years, any profit on disposal is exempt from CGT, potentially saving a small fortune if the company performs well.

The company could, of course, perform badly with the share value decreasing or worse, becoming worthless. Ordinarily, any loss would be treated as a capital loss and only able to offset against other gains, which may take years. However, both EIS and SEIS shares qualify for a specific relief, meaning a person could elect for the loss to be offset against their income. For many people, tax relief would be obtained much sooner, with the added benefit of saving more tax as the tax rates on income are higher than capital gains.

With EIS, an investor can elect to defer capital gains on the sale of other chargeable assets, e.g. shares or property, by investing in EIS within a qualifying window. Any reinvestment of proceeds in EIS must be within 12 months before or 36 months after the disposal of the original asset. 

Seed Enterprise Investment Scheme (SEIS)

SEIS companies are smaller early-stage companies compared to EIS, with smaller assets and employee requirements. As such, whilst SEIS shares have many of the same benefits and conditions as EIS shares, there are some unique differences.

Income tax

The income tax reducer is calculated as 50% on the amount subscribed, although the annual limit is much lower at £100,000.

An investor must remain unconnected, although for SEIS the restriction for directors doesn’t apply.

Capital gains tax (CGT)

Reinvestment relief operates differently for SEIS where, rather than simply deferring the gain, it exempts an amount from CGT. The amount of exempt gain is 50% of the available SEIS expenditure.

What should I do?

We strongly advise you to speak with an independent financial advisor before making any investments.

You can get in touch with your usual Larking Gowen contact to discuss how your specific anticipated investment will affect you. You can find contact details in the Our People section of our website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

You can download our EIS and SEIS brochure here to find out more about the schemes including examples.

Luke Jackson