What tax reliefs can I get for investing in EIS & SEIS qualifying companies?

The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) are schemes which encourages individuals to invest in certain companies by giving income tax and capital gains tax relief on the amount invested.

The main difference between the two schemes is that the Seed Enterprise Investment Scheme tends to support smaller, early-stage (or ‘seed’) companies, which often have difficulty in accessing equity finance. Naturally, these companies are seen as higher risk so the tax reliefs under the SEIS are more favourable than under the EIS, though both schemes can provide serious tax advantages.

An individual can also claim both EIS and SEIS relief in the same tax year if they want.

Enterprise Investment Scheme (EIS)

An individual can receive tax relief in their income tax computation where they subscribe for shares in a qualifying EIS company.

Tax relief is available in respect of the lower of the amount subscribed or £1 million (unless there is investment in what’s known as a ‘knowledge intensive company’, in which case the maximum investment is doubled to £2 million).

The income tax relief is given by way of a tax reducer at a flat rate of 30%. The maximum amount of income tax relief that an individual can receive is therefore £1 million × 30% = £300,000 (again, this is doubled for knowledge intensive companies).

Income tax relief is usually given to the investor in the year in which the subscription is made, but it’s also possible to carry back an EIS subscription to the preceding tax year (i.e. claim relief for the previous tax year).

The shares need to be held for three years to ensure there is no clawback of the relief.

As well as the income tax relief, if an investor has any capital gains arising in the three years prior to the investment in the qualifying EIS company, he/she maybe able to defer the capital gain (and therefore receive a tax repayment) until such time as the EIS shares are disposed of.

If that wasn’t enough, further tax relief is given if the business goes pear shaped and the shares become of negligible value, because the loss can be offset against an investors general income.

The combination of these reliefs significantly reduces an investors risk from the investment.

Seed Enterprise Investment Scheme (SEIS)

As is the case for the EIS, income tax and capital gains tax relief will be available where an individual subscribes for shares in a qualifying SEIS company.

Relief is calculated in respect of the lower of the amount subscribed or £200,000, and it is given by way of a tax reducer at a flat rate of 50%. Although the amount  of investment which qualifies for relief is significantly lower than under the EIS, the rate of relief is higher to help make investments commercially viable for investors (because seed companies are deemed higher risk).

The maximum amount of income tax relief that an individual can obtain under the SEIS is therefore £200,000 @ 50% = £100,000. Most claims for SEIS relief will be made via the self-assessment tax return. However, a claim for SEIS relief can be made up to five years after the 31 January following the end of the tax year in which the shares are issued.

A disposal of the shares within three years will result in a clawback of the relief, exactly as for the EIS.

Capital gains in the year of investment or the preceding year can be exempted (as opposed to deferred is the case under the EIS), and any losses on the sale of the SIES shares can be offset against general income.