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EIS and SEIS tax breaks explained

Figures recently released by HMRC reveal that despite the amount invested into EIS and SEIS being lower for the tax year 2015/2016, the amount raised is still the second highest amount ever raised since the scheme began in 1994 at £1.6bn for EIS and £169m for SEIS. Market experts attributed the reduced figures largely to regulation changes and the removal of energy generation as an EIS qualifying investment and indeed many expected the drop in investment to be higher.
The schemes remain extremely important and necessary sources of funding for UK businesses and offer some of the most attractive tax breaks available in the UK.
Kelly Garside, Tax Director at Cowgill Holloway gives a brief guide to EIS and SEIS investments.
Enterprise Investment Scheme (EIS)
The Government set up the EIS in 1994. Today, it still offers a number of tax breaks to investors who buy shares in small, private companies. To be eligible for the reliefs set out here, you must have held the shares for three years before sale.
In the example below, we’ll presume that the individual invests £30,000 (the maximum amount an individual can invest each year is £1 million).
The reliefs are:
• Income tax relief of 30% is available on the investment
Simply, this means that an investment of £30,000 in a company that is eligible for EIS results in a £9,000 reduction to your income tax bill in the year you invest.
• No capital gains tax is payable on profits made from an EIS investment
Therefore, if you invest £30,000 and five years later sell your shares for £40,000, you’ll get the full benefit of the £10,000 profit.
• Investment losses can be offset against income tax
For example, if you lose the entire £30,000 investment you can choose to reduce your taxable income for the year in which you disposed of the shares by £21,000 i.e. the initial investment of £30,000 less the initial £9,000 tax relief.
• Shares bought through EIS are exempt from inheritance tax
Seed Enterprise Investment Scheme (SEIS)
The SEIS, established in 2012 is newer than its parent initiative, EIS. Whilst it is very similar to EIS it is designed for investing in even smaller companies, therefore provides even more generous tax breaks.
The maximum workforce and gross assets allowable under SEIS are lower than EIS, at 50 staff and £200,000 gross assets. Businesses must also be less than two years old whilst there are no age restrictions under EIS. Under SEIS, a taxpayer may invest up to £100,000 in a qualifying new start-up business and be eligible for income tax relief of 50 per cent.
The tax breaks are as follows:
•Income tax relief at 50 per cent. As an example, you get £15,000 off your income tax bill for investing £30,000 under SEIS.
•As with EIS, there is no CGT to pay on profits, no inheritance tax, and you can claim loss relief if you lose out on your investment.
•An extra relief called capital gains reinvestment relief is available. This is particularly useful where an investor has recently paid capital gains tax on other investments. Up to 50% of the tax paid can be reclaimed if the money is reinvested into SEIS.
Under SEIS, presuming that an individual has a tax liability of £20,000 but invests £30,000 and their SEIS relief is capped at £20,000, they are able to utilise the unused £10,000 against the previous year’s tax liability.
It’s worth remembering that there is no SEIS rate earlier than 2012 to 2013 so there is no scope for carrying back relief back before that year.
Investing in small companies can be more risky than buying shares in larger established entities and the fact that the companies are not listed on the stock market can make it more difficult to sell your shares. However, small companies can grow very quickly so whilst you may be more at risk of losing your money, you are also far more likely to make a significant return on your investment.
You should always check that the company you’re investing in is definitely eligible for EIS or SEIS – and make sure you’re happy with it as an investment. Never invest just for the tax breaks. For advice on EIS, SEIS or indeed any tax and estate planning advice please contact Kelly Garside.
 


This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.

Kelly Garside
Disclaimer

The information was correct at time of publishing but may now be out of date.

Tax
Posted by Cowgills
12th May, 2017
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