In a gesture that recognises the challenge of funding new ventures the UK government offers two generous tax incentives designed to accelerate investment in sectors it recognises as vital to future economic prosperity.
- The Enterprise Investment Scheme (EIS)
- The Seed Enterprise Investment Scheme (SEIS)
The two schemes are slightly different, but in very (very) general terms they enable taxpayers to claim a rebate on the value of 30 percent of any share investments they might make in an early stage project recognised as having EIS or SEIS status.
A little more information about these two tax breaks:
EIS investors enjoy an initial 30% income tax saving and exemption from capital gains tax when the EIS shares are disposed of if the shares are held for a qualifying period.
It’s not quite a free for all – you can only claim EIS tax relief on a maximum of £1 million investment in any tax year (however a married couple can invest a million each). You can’t claim tax relief on any loans drawn to purchase the shares.
The company offering the EIS is limited to raising up to £5 million from that and two other schemes, the corporate venturing scheme and the venture capital trust scheme. The key limitation is that the company must operate within a “qualifying trade” and must also have fewer than 250 full-time employees.
The company you invest in must have a permanent establishment in the UK and must not have in excess of $15 million in gross assets before the share issue takes place.
Investors are locked into the scheme for a minimum of three years – they can’t exit the investment until that period has passed.
One more thing: “If shares are disposed of at a loss, the investor can elect that the amount of the loss, less Income Tax relief given, can be set against income of the year in which they were disposed or, on income of the previous year instead of being set off against any capital gains,” says Crowdcube.
“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,” said Michael Portillo, Chief Secretary to the Treasury when the scheme was launched in 1993
You should read HMRC’s guidance notes on EIS here.
Under the SEIS, investors can invest up to £100,000 across a number of companies in a single tax year and don’t have to pay any Capital Gains Tax for gains they make on SEIS shares. Companies can raise no more than £150,000 in total via an SEIS investment.
However, in exchange for the investment investors cannot gain control of the company they invest in and aren’t permitted to take more than a 30% stake in that firm.
The benefit is good: investors can receive up to 50% tax relief in the tax year in which the investment is made, regardless of their marginal rate. In other words under SEIS you can claw back half of any qualifying investment made in terms of tax relief. There’s additional benefits, too, particularly when you cash in your investment — there’s an excellent PDF describing this in more detail here.
There’s some additional caveats to SEIS: The company invested in must be a UK firm with a permanent base in the country; it must also have under 25 employees and be no more than two years old and have assets of under £200,000. Finally, the company you want to take position in has to trade in an approved sector.
Chancellor George Osborne intends making some form of SEIS a permanent part of tax law (so it will always be available) later this year.
You should read HMRC’s SEIS guidance notes here.
There’s a little more detail to both these schemes, and you can’t claim them retrospectively — the company you take an investment in must have been accepted as a body covered by one of these schemes before you invest.
It’s also important UK tax payers recognise that the way these investments impact your own tax status will depend on your individual circumstances and may be subject to future change, so please speak to your tax adviser before you invest.
Photo credit: HM Treasury