Both the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) should be considered by both individuals and companies, for two reasons:
- As an individual taxpayer, you can save personal tax by investing in EIS/SEIS shares.
- As a business owner, your company can potentially issue shares under the EIS/SEIS, raising capital and allowing the investors buying those shares to save personal tax!
The SEIS and EIS are two government-backed schemes that encourage investment in seed and early-stage companies. they have been around for years – but recently they have been extended until at least April 2035. Investors receive attractive tax benefits should the company they back fail or succeed, while the company itself receives the funds it needs to grow and develop.
Firstly, as an investor, the company you want to invest in must be eligible for SEIS/EIS in order for you to claim the tax reliefs associated with the schemes. Most companies apply for advance assurance (and most investors require it) from HMRC before any agreements are made. So, it’s worth asking the company for proof of their advance assurance letter before parting with your cash.
EBA has just completed the process of applying for and obtaining SEIS advance assurance from HMRC for a client company, issuing the new shares and then obtaining personal tax refunds totalling £55,000 for two investors. It’s quite a result for all concerned.
From the company’s perspective, while advance assurance isn’t mandatory, many investors see it as such – so it’s definitely worth applying for advance assurance to increase your chances of securing investment.
Here, I’ll explain the different rules and conditions investors must meet to claim the tax benefits associated with each scheme.
SEIS rules for investors
Hold the shares for at least 3 years
If you sell any of the SEIS shares within three years, your tax reliefs may be withdrawn or reduced. So, to maintain the scheme’s full tax benefits, you must hold the shares for at least three years. The shares must also be ordinary shares with non-preferential rights to dividends or capital, and paid in full (in cash) upfront.
Have a UK tax liability
You don’t necessarily need to live in the UK or even be a resident, but you will need a UK tax liability to claim the relief. Let’s say you invest £50,000 in SEIS shares. You’ll get a 50% ‘tax reduction’ – that’s £25,000 off your tax liability. If your tax liability had been exactly £25,000, it would disappear completely. If your tax liability had been, say, £15,000, that too would disappear (but you wouldn’t get a £10,000 refund!) in other words, as a ‘tax reducer’ SEIS investments can only bring a tax liability down to zero. If you’d already paid your tax liability for the year through PAYE, you would however get that back. Even better, if you were to make an SEIS investment today (September 2024), you could treat is as if you had made it in the previous tax year if you want to, potentially wiping out a liability from 2023/24.
Not an employee or associate of one
You and your associates (i.e. business partners, certain relatives and spouses/civil partners) cannot be employed by the company. Siblings and cousins aren’t considered associates, so they could be employed.
But you can be a paid director
You can be a paid director and invest in your own company, as long as you don’t have a ‘substantial interest’ (i.e. have 30% or more of the shares or voting control in the company from the time of incorporation until at least three years after the share issue).
No related investments
If you have a substantial interest in company X and reach an agreement with the owner of company Y to invest in each other’s companies through SEIS, that would be classed as a disqualifying event and you would lose your tax benefits.
No linked loans
You and your associates cannot have any loans linked with the company in question.
No tax avoidance
The investment you make must pose a genuine risk of loss of capital, while the company must use the money to grow and develop. A bit like the related investments and linked loans conditions above, you cannot devise a plan with the company and its associates to use the investment for the purpose of tax avoidance.
EIS rules for investors
EIS rules are slightly different in that the connection between investor and company cannot be as intertwined. This applies primarily when a director wishes to invest in their company. But, for the most part, the rules for both schemes are pretty similar.
Hold the shares for at least 3 years
Identical to SEIS, if you sell any of the EIS shares within three years of receipt, your tax reliefs may be withdrawn or reduced. So, to maintain the scheme’s full tax benefits, you must hold the shares for at least 3 years. The shares must also be ordinary shares with non-preferential rights to dividends or capital, and paid in full (in cash) upfront.
Have a UK tax liability
This works, in principle, exactly as explained above for SEIS. However, the tax reduction for EIS is 30% rather than 50%. So, a £50,000 EIS investment will reduce your tax liability by £15,000 rather than £25,000. Again, you can’t use EIS to create a negative tax liability, but you can use it to get a refund of tax already paid for the year.
Not an employee or ‘connected’ with the issuing company
You cannot be an employee of the company you wish to invest in, nor can your associates (see the SEIS condition for more details) for at least two years before the share issue (or the company’s incorporation if later).
Unlike SEIS, you cannot be a paid director and receive EIS tax relief, however, you can if you’re an unpaid director. This is also dependent on the director not having a substantial interest in the company (holding 30% or more of the shares or voting rights).
No linked loans
For at least two years before the share issue (or the company’s incorporation if later), the investor and their associates cannot receive a loan from the company. If the loan was made solely because of the EIS investment, that would be a disqualifying event. This condition applies after the investment has been made too (i.e. you cannot receive a loan from the company for at least 3 years after the share issue).
No tax avoidance
As an investor, you have an obligation to make the investment for genuine commercial purposes and not as part of a scheme or arrangement for tax avoidance.
This falls under both the SEIS and EIS ‘risk to capital’ condition the receiving company must meet, where they must spend the money to grow and develop, which presents a risk of loss of capital to the investor. Likewise, the investor must understand how the company intends to grow and develop and see genuine commercial potential in it.
HMRC doesn’t have any hard and fast rules for the tax avoidance condition, and they judge it on a case-by-case basis.
Of course, SEIS and EIS provide great tax advantages for investors, but HMRC will decide on this condition based on the facts and circumstances around the other conditions, such as whether the investor is associated with the company at all or has any outstanding loans or agreements.
Lots of things to consider! Get in touch with EBA if you want to know more about making an investment under SEIS/EIS or if you are looking to raise new capital for your business by issuing shares.
