SEIS/EIS Tax Breaks

Download

Investing in startup companies is generally much riskier than buying shares in larger more established companies, but the returns are potentially far, far greater. As a means of offsetting this risk for investors and thereby incentivising them to invest, the UK government offers two attractive tax breaks known as SEIS and EIS (the 'Seed Enterprise Investment Scheme'; and its parent the 'Enterprise Investment Scheme').

These tax breaks are very generous to investors and have been instrumental in helping the startup industry grow in the UK. As a result, investors naturally place high value on companies that have qualified for SEIS & EIS.

SEIS

What’s SEIS?

HMRC gives the following overview:

…[SEIS] is designed to help small, early-stage companies raise equity finance by offering tax reliefs to individual investors who purchase new shares in those companies.

Startups who qualify will be eligible to offer up to £150,000 in SEIS shares to investors.

What are the principal benefits for investors?

  • SEIS is incredibly generous and investors will get 50% tax relief per tax year on investments up to £100,000
  • Investors will also get Capital Gains exemption on the disposal of assets
  • There is a ‘carry back’ facility which allows investors to treat shares as if they were acquired in the previous tax year. Hence the relief can be claimed for the tax year before the investment.

Example:

Angel Investor Yoda invests £100,000 into ‘Force for Good’, a ground-breaking social enterprise startup which qualifies for SEIS.

For the given tax year, Yoda has a tax liability of £50,000. Because of his SEIS shares he gets 50% of the value of his investment in relief, so £50,000. This means he pays £0 in tax rather than the £50,000 he owes in tax. This situation is irrespective of how well the company does.

Failure:

If the company folds, Yoda will still receive his £50,000 in tax relief meaning only half his initial investment of £100,000 is at risk; and he will also be given loss relief of 45% of the ‘at risk’ capital i.e. the remaining £50,000. 45% of £50,000 is £22,500.

So if the company folds, Yoda will only have lost £27,500 even though he invested £100,000. That’s relief of 72.5%!

Success:

If the company exits and Yoda has held his shares for 3 years or more, he is then exempt from Capital Gains Tax (CGT) on the returns!

So, let’s say he invested his £100,000 at a post-money valuation of £3 million and the company exits 3 years later at a valuation of £30 million, he will get a multiple of 10x return on his investment - £1million (ignoring dilution etc for ease of explanation). As he has held the shares for at least three years, he is completely exempt from capital gains tax on his returns.

Does the company you’re interested in qualify?

N.B. These tax breaks are only available to UK based companies; investors do not need to be UK resident but must have some UK tax liability against which to set the tax relief.

For a company to qualify for the SEIS scheme it must meet a number of qualification tests. The full procedure manual can be found here:

In your due diligence and discussions with the company you should make sure they have been given assurance of their qualification for SEIS by HMRC before investing.

Once all the term sheets have been signed between you and the entrepreneur, they will send you the relevant SEIS form which you can then fill in and send to your accountant as part of your tax return.

EIS

What’s EIS?

EIS is the parent of SEIS. The principle is the same – to encourage investors to invest in early stage companies by offering them a generous tax break based on the sum they invest.

When the scheme was launched in 1993 the then Chief Secretary to the Treasury, Michael Portillo, said; ”The purpose of Enterprise Investment Schemes is to recognise that unquoted trading companies can often face considerable difficulties in realising relatively small amounts of share capital. The new scheme is intended to provide a well-targeted means for some of those problems to be overcome.”

EIS is less generous in terms of relief but it is easier for companies to qualify for and there is a larger quota available for eligible companies to offer investors.

Startups are able to offer up to £2,000,000 in EIS shares.

What are the benefits for investors?

  1. Can invest up to £1,000,000 a year in EIS shares.
  2. Investors will get 30% tax relief per tax year
  3. Any gain is exempt from Capital Gains tax provided the shares have been held for at least 3 years.
  4. Loss relief via tax liability upon disposal of shares for a loss
  5. ‘Carry back’ facility so the shares can act as tax relief for the previous tax year

Example:

Angel Investor Vader invests £100,000 into ‘Death Star Inc’, a highly disruptive Fintech startup which qualifies for EIS.

For the given tax year, Vader has a tax liability of £50,000. Because of his EIS shares he automatically gets 30% of the value of his investment in relief, so £30,000. This means he pays £20,000 in tax rather than the £50,000 he owes in tax. This situation is irrespective of how well the company does.

Failure:

If the company folds, Vader will still receive his £30,000 in tax relief meaning only £70,000 of his initial investment is at risk; and he will also be given loss relief of 45% of the ‘at risk’ capital i.e. the remaining £70,000. 45% of £70,000 is £31,500. So if the company folds, Vader will only have lost £38,500 even though he invested £100,000. That’s relief of 61.5%!

Success:

If the company exits and Vader has held his shares for 3 years or more, he is then exempt from Capital Gains Tax (CGT) on the returns!

So, let’s say he invested his £100,000 at a post-money valuation of £3 million and the company exits 3 years later at a valuation of £30 million, he will get a multiple of 10x return on his investment - £1million (ignoring dilution etc for ease of explanation). As he has held the shares for at least three years, he is completely exempt from capital gains tax on his returns.

Does the company you’re interested in qualify?

N.B. These tax breaks are only available to UK based companies; investors do not need to be UK resident but must have some UK tax liability against which to set the tax relief.

For a company to qualify for the EIS scheme it must meet a number of qualification tests. The full procedure manual can be found here:

In your due diligence and discussions with the company you should make sure they have been given assurance of their qualification for EIS by HMRC before investing.

Summary

If you’re considering investing in a company, SEIS and/or EIS can make the investment an even juicier proposition, mitigating the risk by a substantial amount. It doesn’t mean that you should only invest in companies that qualify; it would be foolhardy to ignore potentially billion dollar companies simply because you’ve missed the SEIS/EIS allowance or they don’t qualify.

But SEIS and EIS qualified companies are seriously hot tickets so make sure you give them full consideration.

global:publish_msg_immediate





global:publish_msg




Congratulations!


You have passed the test and you may continue your with your investment.