As your business develops, it is likely there will come a time you need additional external finance to help you expand. It may be important to ensure your investors receive the relevant tax incentives to enable suitable investment.
Outside of taking commercial loans from banks, third party investors can be vital to help future investment. Attracting investors is not always easy, especially with the associated higher risk with ‘start-up’ businesses. The UK’s Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) help to encourage third-party individuals to invest in a new company.
What are the EIS and SEIS?
These regimes are designed to help smaller, riskier trading companies to find investors. The EIS allows a UK individual investor to obtain Income Tax relief on newly subscribed shares in a qualifying company, along with the opportunity to defer Capital Gains Tax (CGT) due on the disposal of other investments:
- Income Tax Relief – Tax relief of up to 30% on investments up to £1 million per tax year (an additional £1 million if companies are Knowledge-Intensive Companies (KICs))
- CGT Deferral Relief – Payment of CGT can be deferred on gains from other investments, up to the value of EIS investment
- CGT Disposal Relief – Gains from EIS not liable to CGT if shares have been held, and remain qualifying, for at least three years
- Loss Relief – If the EIS shares are disposed of at a loss, the loss (less income tax relief claimed) can be set against their income in that year, or the previous year
- Business Property Relief (BPR) – EIS shares should qualify for Inheritance Tax relief through BPR if held for at least two years.
The SEIS is similar to the EIS but is aimed at even smaller companies (those in the very early stages of their start-up). The SEIS offers slightly enhanced benefits to the investor to reflect the higher risk:
- Income Tax Relief – Tax relief of up to 50% on investments up to £200,000 per tax year (maximum £100,000 before 6 April 2023)
- CGT Reinvestment Relief – gains from other investments can be exempt from CGT up to 50% of the value invested into the SEIS
- CGT Disposal Relief – Gains from SEIS not liable to CGT if shares have been held, and remain qualifying, for at least three years
- Loss Relief – If the SEIS shares are disposed of at a loss, the loss (less income tax relief claimed) can be set against their income in that year, or the previous year
- BPR – SEIS shares should qualify for Inheritance Tax relief through BPR if held for at least two years.
These reliefs can make investments into EIS and SEIS very appealing for investors and can aid a company in raising external finance from individuals.
Does your company qualify for EIS and SEIS?
There are a number of requirements that need to be met by companies, and continue to qualify for three years, to qualify for EIS or SEIS. These include:
- It must be an unquoted (although some AIM companies qualify) trading company or holding company of a trading group, which isn’t controlled by another company
- Trading activities carried on by the company/group must not substantively (more than 20%) include ‘excluded activities’. Excluded activities include banking, certain financial activities, property development and farming, among others
- Companies must be within the first seven years of trading to qualify for EIS relief, and within three years (two years before 6 April 2023) of trading to qualify for SEIS relief. HMRC restricts the use of SEIS if EIS has already been used to receive investment
- The company or group must not have gross assets of more than £15m or more than 250 employees before issuing shares and must not have £16m of gross assets after the issue of shares, for the shares to qualify for EIS relief
- For SEIS, the company’s gross assets limit is £350,000 (£200,000 before 6 April 2023) and the company must have no more than 25 employees for the shares to qualify for SEIS relief
- The maximum a company can raise through EIS each year is £5 million (£10 million if KICs), and £12 million in the company’s lifetime (£20 million if KICs)
- Through SEIS the maximum that can be raised is £250,000 (150,000 prior to 6 April 2023).
What about the investor?
For EIS and SEIS, the investors must be individuals:
- Who are not employees or directors of the company (for SEIS the investor can be a director if certain conditions met)
- Who do not have more than a 30% stake in the company, in terms of shareholding, voting rights, and certain other economic tests
- Who do not have any linked loans to the company investing into.
What are the rules on the raised investment?
Funds received via EIS subscribed shares must be used in the company’s trade within two years of being issued. For SEIS funds, this is within three years or two years if there is an existing qualifying trade (there can also be other conditions).
Companies must ask for prior approval from HMRC to implement the schemes. They can apply for advance assurance, before the investment, to reassure potential investors that the company meets the qualifying conditions for EIS/SEIS relief.
