Enterprise Investment Scheme (EIS)
The Enterprise Investment Scheme (EIS) provides tax relief to individuals who invest in qualifying companies, encouraging public investment in small, high-risk businesses.
Key Benefits
Under EIS, investors receive a flat-rate tax relief of 30% on their investment, with a maximum investment limit of £1 million. If the investment is made in a knowledge-intensive company, the limit increases to £2 million.
Income Tax
To qualify for EIS income tax relief, the investor must not be connected to the EIS company. This means they cannot be an employee or hold more than a 30% interest in the company prior to the investment. However, they may become an employee after the subscription, provided their remuneration is at market rates.
Investors can carry back their EIS subscription to the previous tax year, subject to previous tax year’s annual limit. It's important to note that this relief can reduce an individual’s income tax liability to zero, but no tax repayment will occur unless tax was withheld at source e.g. PAYE.
To retain the income tax relief, investors must hold the shares for a minimum of three years. If the shares are sold before this period, the relief will be clawed back, calculated as the lower of:
The original income tax relief claimed
The sale proceeds multiplied by the rate of initial relief, if sold at a loss
Capital Gains Tax
In addition to income tax relief, EIS investors can also benefit from capital gains tax (CGT) relief. If an individual realises a gain on any asset, that gain can be deferred by investing in EIS shares. The deferred gain is limited to the lower of:
The gain on the asset
The amount subscribed for EIS shares
Any other amount that allows for the use of the Annual Exempt Amount (AEA)
Unlike EIS income tax relief, investors can be connected to the company and still qualify for EIS reinvestment relief. For this relief, EIS shares must be purchased within 12 months before and up to three years after the deferred gain occurs.
When EIS shares are sold, the initial deferred gain becomes chargeable. If only a portion of the shares are sold, only that portion of the deferred gain is taxable.
If a loss is incurred from the sale of EIS shares, this loss is always allowable, regardless of the holding period. However, the capital loss is restricted by the income tax relief retained, which only applies if the shares were held for at least three years.
Additionally, losses on the sale of EIS shares can be offset against net income instead of capital gains, as stipulated under Section 131 of the Income Tax Act 2007.
Gains from the sale of EIS shares are exempt from CGT if the shares are held for three years and the investor claimed income tax relief on the subscription. Otherwise, the sale will generate a chargeable gain as per normal CGT rules.
Seed Enterprise Investment Scheme (SEIS)
The Seed Enterprise Investment Scheme (SEIS) allows investors to claim tax relief on shares subscribed in qualifying small, early-stage companies. This initiative encourages investment in startups by offering attractive tax benefits.
Tax Relief Overview
Investors can claim a flat rate of 50% tax relief on the amount subscribed, with a maximum investment limit of £200,000.
Income Tax
To qualify for SEIS income tax relief, individuals must not be connected to the SEIS company—this includes being an employee or holding more than a 30% interest in the company. However, an individual can become an employee after the subscription, provided their remuneration is at a commercial rate.
Investors may carry back their SEIS subscriptions to the previous tax year, up to the maximum limit. It’s important to note that SEIS shares must be held for at least three years; if they are sold before this period, the income tax relief will be withdrawn. The clawback amount is determined by the lower of:
a) The original income tax relief claimed, or
b) The sale proceeds multiplied by the rate of initial relief (if sold at a loss).
Capital Gains Tax
Unlike EIS reinvestment relief, which defers gains, SEIS allows investors to exempt 50% of the lower of the following:
a) The gain on any asset,
b) The amount on which SEIS income tax relief was claimed, or
c) Any other amount (to utilise the Annual Exempt Amount).
Capital Gains Tax relief is available only if the income tax relief is claimed and the disposal occurs in the same year. If SEIS shares are sold within three years, any relieved gain becomes chargeable. However, if the shares are held for at least three years and the income tax relief was obtained on subscription, the gain from the sale is exempt from capital gains tax.
Regardless of the holding period, capital losses on the sale of SEIS shares are always allowable, but they are restricted by any retained income tax relief. Additionally, capital losses can be offset against net income instead of capital gains under Section 131 of the Income Tax Act 2007.
Venture Capital Trusts (VCT)
Venture Capital Trusts (VCTs) provide tax relief on subscriptions for shares, similar to the relief offered by the EIS and SEIS. However, VCT shares are traded on the stock exchange, unlike EIS and SEIS shares, which pertain to unquoted trading companies.
Tax Relief Overview
Investors in VCT shares can receive a tax relief of 30% on the amount subscribed, with a maximum subscription limit of £200,000.
Income Tax Considerations
To benefit from the income tax relief, investors must hold their VCT shares for at least five years. If the shares are sold before this minimum period, the income tax relief will be withdrawn. The clawback amount is determined by the lower of:
a) The original income tax relief claimed, or
b) 30% of the sale proceeds (if sold at a loss).
It’s important to note that carry back of VCT subscriptions to the previous year is not permitted.
Dividends received on the first £200,000 invested are tax-free.
Capital Gains Tax
Gains from the sale of the first £200,000 in a tax year are exempt from capital gains tax. Similarly, losses on the sale of the first £200,000 are not considered allowable capital losses, regardless of how long the VCT shares are held.
Speak to an Expert
If you’re considering obtaining SEIS status for your business or want to understand how this investment can help reduce your tax liability, seek professional advice. For any questions about SEIS and its operations, please reach out to our tax team—we’re here to help!
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