How Investors Can Benefit from EIS and SEIS Funding
The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are two government-backed initiatives in the UK designed to encourage investment into small and early-stage companies. These schemes offer investors significant tax incentives, making them attractive options for individuals looking to support high-potential businesses while mitigating risk.
Understanding how EIS and SEIS funding work, and the benefits they offer, can help investors make informed decisions that could enhance their portfolios.
What are EIS & SEIS?
EIS was introduced in 1994 to help small and medium-sized enterprises (SMEs) raise finance by offering tax reliefs to individual investors. The scheme primarily targets companies that are expanding and require larger amounts of funding.
SEIS, introduced in 2012, focuses on much earlier-stage companies, providing even greater tax incentives for investors willing to support start-ups. The scheme is designed for businesses at the very beginning of their growth journey, with a greater focus on high-risk but high-reward ventures.
Both schemes offer compelling tax benefits and have proven to be essential funding mechanisms for innovative UK businesses, particularly in industries like technology, biotech, and green energy.
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Significant Tax Reliefs
The most attractive aspect of both EIS and SEIS is the potential for tax relief, making them a highly tax-efficient investment strategy.
- Income Tax Relief:
- Under SEIS, investors can claim up to 50% income tax relief on investments up to £100,000 per tax year.
- Under EIS, investors can claim 30% income tax relief on investments up to £1 million (or £2 million if at least £1 million is invested in knowledge-intensive companies).
This means that if you invest £10,000 in an SEIS-qualifying company, you can reduce your income tax bill by £5,000. For EIS, a £10,000 investment would result in a £3,000 reduction in your income tax liability.
Capital Gains Tax (CGT) Relief
Investors benefit from CGT relief on any gains made from the disposal of EIS or SEIS shares, provided they have held the shares for at least three years.
- For SEIS, 50% of any capital gains made on other investments can be exempt if reinvested in an SEIS company.
- For EIS, investors can defer CGT on gains from other investments if they reinvest those gains into EIS-qualifying businesses.
This allows for potentially large reductions in the amount of tax owed on the sale of assets like stocks, property, or other investments, as long as the gains are reinvested through these schemes.
Inheritance Tax (IHT) Relief
EIS and SEIS investments are generally exempt from inheritance tax if they are held for more than two years. This provides investors with an additional tool for estate planning, as the value of the shares can be passed to heirs without facing a significant tax burden.
Loss Relief
While early-stage investments carry higher risks, both schemes offer protection if things go wrong. Investors can claim loss relief if the company underperforms or fails. For SEIS, loss relief is calculated after accounting for the 50% income tax relief already received. Similarly, EIS allows for loss relief based on the effective net loss after tax relief, which can be set against income or capital gains.
For example, if an SEIS investment of £10,000 fails, and the investor is in the 45% tax bracket, their effective loss may be reduced to just £2,750 after income tax relief and loss relief.
Deferral of Capital Gains with EIS
For investors who have already made capital gains, EIS offers a significant opportunity for capital gains deferral. This means that any capital gains tax owed can be deferred by reinvesting the gains into EIS-qualifying companies. The tax liability is deferred until the shares are disposed of, at which point the gains can either be further deferred or paid at the current tax rates, which may be lower by that time.
Portfolio Diversification
Investing in EIS and SEIS companies can add valuable diversification to a portfolio. These schemes often fund companies in sectors like technology, renewable energy, healthcare, and other innovative industries. By investing in smaller, fast-growing companies, investors can spread risk across a variety of sectors and stages of business growth, which could offer higher long-term returns compared to more traditional investments.
Support for Innovative and Impactful Businesses
Beyond the financial benefits, EIS and SEIS allow investors to support innovative businesses that are often at the cutting edge of technology and societal change. By backing these early-stage ventures, investors not only seek financial return but also contribute to job creation, economic growth, and technological advancement in the UK. Some investors may find great personal satisfaction in being a part of transformative business ideas, particularly in sectors like green technology, education, or healthcare.
- Why Invest in EIS & SEIS?
Risks to Consider
While the tax reliefs available through EIS and SEIS are compelling, it’s important to remember that these are still high-risk investments. Early-stage companies, particularly those targeted by SEIS, have a high failure rate. Investors should ensure they are comfortable with the potential for significant losses, despite the mitigating tax benefits.
EIS and SEIS investments also tend to be illiquid, meaning that shares can be difficult to sell quickly. Investors need to be prepared to hold onto their shares for at least the three-year qualifying period required to fully benefit from tax reliefs.
Who Should Consider EIS and SEIS?
EIS and SEIS can be beneficial for a range of investors, but they are particularly appealing to:
- High-net-worth individuals seeking tax-efficient ways to reduce income and capital gains tax.
- Angel investors or those who enjoy backing innovative start-ups and early-stage ventures.
- Investors looking for portfolio diversification through exposure to high-growth, early-stage companies in emerging industries.
- Individuals involved in estate planning, due to the inheritance tax benefits of holding shares for two years or more.
What Happens Next...
EIS and SEIS provide investors with substantial tax relief, diversification opportunities, and the chance to support innovative, high-growth businesses. While these schemes do involve higher risks, the generous tax incentives and potential for high returns make them an appealing option for many investors. Understanding the benefits and risks, and seeking professional advice when necessary, can help investors make the most of these powerful government-backed initiatives.
Investors who wish to tap into the dynamic world of early-stage business growth can significantly enhance their portfolios while enjoying a variety of tax advantages.
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- Our expertise
What we specialise in...
Our focus is on UK based companies within the fintech and banking sectors, including blockchain technology. We also have an expertise in developing Shariah compliant financial models.
We seek out businesses with strong fundamentals and leadership teams that share our passion for innovation and growth. Typically, we work with businesses that are in the early growth stage, looking for not just capital, but an experienced partner to scale their operations and drive profitability.
- What we believe
Why Choose Us?
- Tailored Investment Solutions: We don’t believe in a one-size-fits-all approach. Each investment is structured to suit the unique needs of the business, ensuring that capital is put to the best possible use.
- Industry Expertise: With years of experience in private equity, our team brings a wealth of industry knowledge to every partnership, offering insights and strategies that help businesses thrive.
- Commitment to Growth: We are committed to long-term success. Our focus is on building strong, profitable companies that can stand the test of time.
Our Values
At the core of everything we do is a strong set of values: integrity, transparency, and commitment. We strive to create lasting, positive relationships with our partners and always act in the best interests of the businesses we work with.
We believe in building value responsibly and sustainably, ensuring that our investments benefit not only our partners but the wider economy.
