Estimated reading time: 7 minutes
EIS and SEIS investors tax incentives to buy shares in small companies.
- The Enterprise Investment Scheme (EIS) supports higher-risk or growing companies.
- Seed Enterprise Investment Scheme (SEIS) businesses are start-ups or early-stage ventures.
EIS launched in 1994, so has been part of the UK tax regime for some time.
It encourages investment in entrepreneurial ventures and unlisted businesses by providing considerable tax reliefs.
Relief claimable applies to a cap of £1 million EIS investment funds, a person, a year, or £2 million for investments where 50 per cent has been invested in knowledge-intensive businesses.
The maximum investment you can claim relief against through SEIS is £100,000.
Here we’ll explain how EIS and SEIS tax relief works and how to claim your full entitlement through your self-assessment tax returns.
Table of contents
Tax Reliefs On EIS And SEIS Investments
The exact tax reliefs available are as follows (although your relief value may vary depending on your tax bracket):
|Maximum annual investment claimable against tax||£1 million or £2 million if at least half is invested in a knowledge-intensive business||£100,000|
|Claimable percentage||30 per cent||50 per cent|
If you pay tax through PAYE as an employee, note that you’ll need to register with HMRC for self-assessment since your employer won’t automatically apply for the tax relief.
Individuals that already submit self-assessment returns don’t need to register or do anything differently other than include these reliefs on their next return.
One feature to be aware of is that you can carry part or some of your investment to the previous year, provided you haven’t hit the upper cap.
The limit stands at £1 million per tax year for EIS and £100,000 for SEIS.
There are other benefits, such as deferred or exempt capital gains tax on disposal of your investment ownership and the option to claim back against losses made.
EIS And SEIS Capital Gains Tax Relief
Tax reliefs on capital gains apply to 100 per cent of EIS investments, and 50 per cent on the SEIS scheme capped at £50,000 for the latter.
EIS capital gains taxes can be deferred, whereas SEIS is capital gains tax-exempt, and profits are not liable for tax when you sell your shares if you received income tax relief.
Capital gains taxes payable aren’t immediately due if you use the profit from an EIS investment to invest in another qualifying business, provided you reinvest between one year before and three years after the sale.
Tax relief illustration
To show how this works in practice, we’ll look at an example where a taxpayer on the additional rate 45 per cent income tax bracket invests £10,000 in an EIS company.
|EIS Business Folds||EIS Shares Keep Value||EIS Shares Double in Value|
|Income tax relief claimable||£3,000||£3,000||£3,000|
|Loss relief claimable||£3,150||N/A||N/A|
|Capital gains tax||N/A||£0||£0|
|Net profit or loss, including tax relief||-£3,850||£3,000||£13,000|
Compared to a conventional investment outside of the EIS scheme, if the shares doubled in value, the capital gains tax payable would be 20 per cent of the gain.
How To Claim EIS Or SEIS Tax Relief
The first step is to ensure that any company you invest in qualifies for EIS or SEIS.
Usually, if the business hasn’t finished the raise or is crowdfunding, you’ll find they are categorised as having Advance Assurance.
That means that HMRC has approved their request preliminarily, as the tax office can’t grant SEIS or EIS full status until investments have been made and qualify for relief.
Advance Assurance isn’t mandatory, but it’s a safeguard since the process involves a decision from the Small Companies Enterprise Centre (SCEC) on whether the venture is eligible.
Other criteria to ensure your investment qualifies for relief include the limit on share purchases, which can’t be above 30 per cent of the ordinary shares.
The investee business will issue a compliance certificate once you’ve invested, which outlines the scheme conditions, and the number of years you need to keep the shares.
You’ll need your certificate before you can claim tax relief.
When To Claim Tax Relief
Investors can claim when:
- The business has been trading for four months or more
- The company has spent 70 per cent of the invested capital.
The SCEC provides the venture with SEIS3 or EIS3 claim forms, which they, in turn, pass onto investors.
Note that the claim form isn’t a standalone document and must be submitted with a self-assessment tax return form.
You can claim tax relief up to five years after the next January 31 following the end of the tax year when you made your investment.
HMRC will need several pieces of information to support your tax relief claim, including:
- Name(s) of companies invested in.
- Values invested and against which you’re claiming relief.
- The date the company issued your shares (not necessarily the same date as the investment transaction).
- Details from the SEIS3 or EIS3, such as a reference code, and which HMRC office authorised the certificate.
Submitting EIS or SEIS tax relief claims
When you prepare your self-assessment return, you’ll need to use the Additional Information pages and enter the investments made in Box 2 on Page Ai 2.
In the Any Other Information box on page TR 7, Box 19, enter the investment details, including the Unique Investment Reference on your certificate and the requirements we listed earlier.
If you’ve made an EIS or SEIS investment and haven’t yet received your certificate, you can’t claim relief.
However, you will be able to in the next period provided you have the paperwork by then (certificates are usually issued about four months after the raise closes).
Claiming EIS And SEIS Tax Relief FAQ
There are some caveats, such as the EIS rule that investors can’t be connected to the company they invest in – for example, being employed by the business or owning a financial interest.
Any connections within two years of the share issue and up to three years after the investment will invalidate the claim.
Connected persons include partners and directors, although unpaid directors remain eligible for tax relief.
A financial interest is classified as owning 30 per cent or more in the business, or a subsidiary company, including voting rights, asset rights, or share capital.
Partners and associates of investors cannot hold interests.
Tax relief on these schemes applies to losses and the investment itself, and capital gains relief on profits made.
If your EIS or SEIS shares fall in value or the company fails, you can offset that loss against your income tax or capital gains tax liability.
Losses can either be claimed in the same year or the following tax period, in addition to any other tax reliefs you are eligible for.
Investors qualify for loss relief when their investment value falls below the effective cost.
You can calculate effective cost by taking your invested amount, less anything already claimed in income tax relief.
For example, an EIS investment of £20,000 with tax reliefs of £6,000, or 30 per cent, means that your effective cost is £14,000.
Some investment fund managers build portfolios of EIS scheme participants. However, each business is a separate investment for tax relief purposes.
Therefore, if one investment within a more extensive portfolio makes a loss, it will likely qualify for the loss relief regardless of how the rest of the portfolio performs.
Shares need to be new ordinary shares without any special rights and paid for in full, in cash to qualify.
If you invest in shares through an asset transfer, the tax relief doesn’t apply.
Investors also can’t use a loan to purchase shares if they took out the borrowing solely to finance the investment.
From March 2018, qualifying investments need to be made using capital at risk.
EIS is the Enterprise Investment Scheme supporting smaller and riskier businesses that raise capital finance by providing tax relief for investors buying new shares in a qualifying company.
You can invest up to £1 million each tax year and claim 30 per cent tax relief, although you’ll need to retain your shares for at least three years.
SEIS is the Seed Enterprise Investment Scheme, introduced in 2012 to encourage start-up investments in new ventures or early-stage businesses.
Investors can apply for tax relief of 50 per cent on investments, capped at £100,000, and claim capital gains tax exemption for any profits made on those shares.
Eligible businesses can raise up to £150,000 through SEIS, and directors can become investors.
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