29 January 2016 by Timothy Lucas

SEIS and EIS relief – extra incentives to invest

There are plenty of good reasons to invest in start-ups or existing small/medium–sized businesses. However, these types of investments are often fairly high-risk. For this reason, a number of tax relief schemes exist to encourage would-be investors.

Two such schemes are the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS). Under both of these schemes, an investor purchasing shares in a qualifying company will benefit from both income tax and capital gains tax (CGT) reliefs.

The tax reliefs

Income Tax: SEIS relief reduces the investor’s annual income tax liability by 50% of the amount invested, subject to a maximum annual investment amount of £100,000. EIS works in a similar way – it reduces the investor’s income tax liability by 30% of the amount invested, subject to a maximum investment amount of £1,000,000 in each year. It is also possible, under both EIS and SEIS, to elect for the investment to be treated as having been made in the previous tax year.

Capital Gains Tax: Under SEIS and EIS, an investor will be exempt from any CGT which arises on the sale of the relevant shares. In addition, on the disposal of any other asset, any CGT liability arising can be (i) reduced by 50% of the amount invested in SEIS eligible shares in the relevant tax year or (ii) deferred by reinvesting the proceeds of the sale in EIS eligible shares.

Conditions for eligibility

The SEIS and EIS tax reliefs are only available if certain conditions are met. These are broadly divided between conditions relating to investors and conditions which relate to the company.

Conditions applying to investors include, among others, the following:

  • The investor must hold the relevant shares for 3 years to obtain the income tax relief and obtain the CGT exemption.
  • The investor may not, either alone or together with any associates (e.g. business partners or relatives), hold more than 30% of the shares in the company or the associated voting rights.
  • For EIS purposes, neither the investor nor his/her associates can have a previous connection with the issuing company e.g. as an employee, a paid director or through any involvement in the company’s business, although they may subsequently become paid directors (NB: under SEIS, the investor may be a director of company, whether paid or unpaid).

Conditions relating to the company include, among others, the following:

  • For SEIS, the gross asset value of the company cannot exceed £200,000 before the investment; for EIS, the gross asset value cannot exceed £15,000,000 before the investment or £16,000,000 after it.
  • At the time of issue of the shares, the company must have fewer than 25 employees (SEIS) or fewer than 250 employees (EIS).
  • For both EIS and SEIS, the company must be unquoted (and there should be no arrangements in place for it to become quoted).
  • Subject to certain exceptions, shares must be issued within 7 years of the company’s first commercial sale of goods or services for the company to qualify for the purposes of EIS.
  • Throughout a specified period after the investment, the company must continuously carry on a qualifying trade – most commercial activities will qualify, but there are certain exceptions e.g. financial services activities and property development.
  • For SEIS, the qualifying trade may only have been carried on for up to 2 years prior to the investment.
  • The company must not be under the control of another company.
  • The shares must be fully paid non-redeemable ordinary shares with no preferential rights.
  • For SEIS to apply, the company can raise a maximum of £150,000 via the relevant investment, or other investments in the previous three years. For EIS, the company cannot raise more than £5,000,000 in relevant investments in the year in which the relevant shares are issued or, subject to certain exceptions, more than £12,000,000 over the course of its lifetime.

Applying for the tax reliefs

Before any investment is made, it is possible for the company to seek advance assurance from HM Revenue & Customs (HMRC) that the relevant relief will apply. Following the investment (and, in the case of SEIS, once 70% of the investment has been spent by the company), the company must send a compliance statement to HMRC. Once this is approved by HMRC, the company should issue a compliance certificate to each investor, who can then use that to claim the reliefs on his/her self-assessment tax return.

If you are looking to invest in shares in a company, please contact Tim Lucas for further legal advice and assistance: TimothyLucas@botlburdon.co.uk or 0207 288 4753.

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