Fancy yourself as a red-hot business guru sitting on TV’s Dragons’ Den with a pile of crisp, freshly printed money to invest with a bright entrepreneur?
Table of contents
The government’s enterprise investment schemes can make your dream come true.
As a business angel, you can meet and grill entrepreneurs seeking investment in their ventures, make them an offer they can’t refuse and pick up some generous tax relief at the same time.
Enterprise investment schemes probably offer some of the best tax breaks globally for savers who have maxed out their pension contributions.
And as a bonus, Investing is open to expats – providing they are still tax residents in the UK.
Government-Approved Tax Breaks
The UK government fully approves Enterprise investment schemes and aims to inject cash into fresh-start/high-growth businesses that generally have problems obtaining finance.
The investment is two different options – the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS). Investors can plough money into both at the same time or opt to put cash into the one.
The mechanics of both schemes are similar, but the amount of investment and tax breaks vary.
But beware. The attrition rate for start-up businesses is sky high, and many fail within the first three years. Although the rewards for EIS and SEIS investments can be great, so can the risk of losing your money.
Investing In EIS Or SEIS Is Easy.
HM Revenue & Customs, which supervises the schemes for the government, assess each business and issues advance approval of acceptance into EIS or SEIS.
From there, potential investors can deal directly with the directors or invest in a fund that takes shares in various businesses.
Investments have some caps. The most that can be invested in a year is £1 million in EIS, while SEIS has a top limit of £100,000. However, investments in ‘knowledge intensive’ businesses can stretch to £2 million under special rules.
EIS And SEIS Tax Breaks Compared
| Tax Relief | EIS | SEIS |
| Income tax | 30% of income tax paid refunded on investments of up to £1 million. (£2m for knowledge-intensive companies) | 50% of income tax paid refunded on investments of up to £100,000 |
| Capital Gains Tax (CGT) | No CGT on EIS or SEIS share growth if the investment is held for at least three years | |
| Losses | Relief is allowed against the loss in value of any shares during the 36 months of investment | |
| Deferral | CGT on assets sold to fund an investment is deferred for an unlimited time | |
| Inheritance Tax (IHT) | Shares in EIS or SEIS companies held for 24 months or more qualify for business property relief |
Avoiding EIS And SEIS Investment Mistakes
The golden rule of EIS and SEIS is investors cannot claim more tax relief than they have paid in income tax.
So, a business angel investing £50,000 in SEIS who has paid £60,000 of income tax in the year can claim a relief of £25,000 on the investment. However, if an investor had paid £20,000 income tax in the year on the same investment, tax relief would be capped at £20,000.
The remainder is written off.
However, investors can carry back tax relief claims to the previous tax year.
Other investment pitfalls include:
- Any gains in share value are liable to CGT if income tax relief is not claimed on the initial investment
- If companies delay or drip-feed funding across more than a year, this can lead to problems with carry-back tax relief
- Early exits can lead to HMRC clawing back tax reliefs
- Companies may lose EIS\SEIS approval if they change their trading sector during the investment
EIS By Numbers
Since the Enterprise Investment Scheme started in 1993, 32,965 companies have raised funds of £24 billion.
- The latest EIS data from HMRC lists 3,795 companies raising £1.658 million in the year to April 5, 2021
- 1,370 new companies raised £350 million as first-time EIS applicants
- Information and communications companies grabbed 34 per cent of EIS investment
- 37,535 investors claimed EIS tax relief in the year
SEIS By Numbers
The Seed Enterprise Investment Scheme was introduced in 2012. Since then, 13,900 companies have received more than £11.5 billion funding.
- The latest HMRC SEIS figures show £175 million was invested in SEIS during the 2020-21 tax year
- 1,660 companies sought SEIS funding for the first time
- Information and communications companies accounted for 41 per cent of all SEIS investment in the year (£72 million)
- 9,195 investors claimed SEIS tax relief in the year. Most invested £10,000 or less
- 64 per cent of companies received investments of £50,000 or more
FAQ’s
Are EIS and SEIS tax avoidance schemes?
No. Both EIS and SEIS offer tax breaks set to rules drafted by the government and are run by HMRC. Providing the investor and the company they are funding follow the scheme’s rules, the tax reliefs can be claimed when filing a self-assessment return.
What is advanced approval for EIS and SEIS?
Companies can apply to join EIS or SEIS in advance of seeking funding. Approval is a nod from HMRC that the company can apply for EIS and SEIS tax reliefs for investors once the final agreement is granted.
Can investors use SEIS and EIS at the same time?
Yes. Investors can put money into both schemes at the same time up to each scheme’s investment caps (£1 million for EIS and £100,000 for SEIS).
How does an EIS or SEIS investment affect a pension?
EIS and SEIS investments have no impact on an investor’s pension savings. Retirement pot limits are unaffected by EIS or SEIS investments and vice versa. Many pension savers turn to EIS/SEIS after maxing out their retirement contributions for the tax year to tax-efficiently invest any excess funds.
What is a business angel?
A business angel is a private investor who provides money to fund a business.
What’s the difference between EIS\SEIS and a bank loan?
SEIS investment rather than a bank loan makes a great difference in how a business is financed. Companies must repay a loan from the day the money was received, while EIS\SEIS cash is swapped for shares and is not repaid. As a result, profits for investors come from share price growth.
Can expats invest in EIS or SEIS?
Expats can claim EIS\SEIS tax reliefs if they are still tax resident in the UK. However, the investment is not viable for non-residents.
Related Information
Below is a list of related articles you may find of interest.
