The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are UK government-backed initiatives aimed at encouraging investment in small, early-stage and high-risk companies. By offering generous tax incentives to investors, these schemes help address the funding challenges that startups often face, supporting innovation and driving economic growth.
Tax Incentives for Investors
SEIS and EIS provide significant tax reliefs for investors, making them a compelling option for those seeking to support early-stage companies while mitigating risk. Under SEIS, investors can receive up to 50% income tax relief, whereas EIS offers 30%. Both schemes also offer capital gains tax (CGT) exemptions and loss reliefs on qualifying shares, incentivising long-term investment in these types of ventures.
Eligibility and Conditions
Qualifying for SEIS or EIS requires companies to meet stringent conditions, such as size, age, and, importantly, the issue of qualifying shares. SEIS focuses on very early-stage businesses, catering to companies less than three years old, with a maximum investment cap of £250,000. EIS accommodates slightly older and larger businesses, allowing investments of up to £5 million annually.
Investors must subscribe for qualifying shares through direct investments or approved funds. Companies can seek advance assurance from HMRC to ensure they comply with the schemes' requirements.
Raising Finance Through SEIS and EIS
SEIS and EIS complement each other, enabling businesses to secure initial funding through SEIS before transitioning to EIS for follow-on financing. This progression supports sustainable growth for startups as they mature.
For companies, the availability of tax reliefs under these schemes, combined with a well-structured business plan, serves as a powerful incentive to attract sophisticated investors. However, compliance with the schemes' conditions is crucial to retaining eligibility.
Using SEIS and EIS Effectively
To maximise the benefits of SEIS and EIS, businesses must understand the tax reliefs available and ensure adherence to the qualifying conditions. Companies should illustrate the advantages of raising investment through SEIS, enhancing their appeal to potential investors.
Key Differences Between SEIS and EIS
While SEIS and EIS share many similarities, key distinctions include:
| SEIS | EIS | |
|---|---|---|
|
Income tax reduction |
50% of the amount invested |
30% of the amount invested |
| Investment limit per investor | £200k | £1m (£2m for knowledge-intensive investments) |
| Maximum investment per company | £250k | £5m annual, £12m in total (£20m for knowledge-intensive companies) |
| Company age | <3 years | <7 years |
| Employee limits | <25 | <250 (<500 for knowledge-intensive companies) |
| Gross assets |
£15m before share issue £16m after share issue |
£350k |
| CGT exemption |
Sale of SEIS shares exempt from CGT if held for three years and income tax relief has not been withdrawn |
Sale of SEIS shares exempt from CGT if held for three years and income tax relief has not been withdrawn |
| Reinvestment relief | Exempts 50% of capital gain | Defers capital gain |
Conclusion
SEIS and EIS represent invaluable tools for UK startups seeking to overcome financing hurdles and secure investment from experienced investors. By understanding these schemes' benefits and conditions, businesses can leverage them to fuel growth and innovation while offering attractive incentives to their supporters.
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