EIS and SEIS Relief

Enterprise Investment Schemes (EIS) encourage investors to invest into certain companies by giving tax relief on the amount invested.

Seed Enterprise Investment Schemes (SEIS) focus more on small or early-stage companies who usually have difficulty accessing equity finance. Again, tax relief is given on the amount invested.

Glossary

  • Subscribing for Shares – when an investor is issued new shares by a company that they invest in.
  • Knowledge Intensive Company – a company that has a high research and development or innovation spend, and that also meets criteria in respect of innovation or number of highly skilled staff involved in innovation.

Enterprise Investment Scheme

Enterprise Investment Schemes provide tax relief by way of a tax reducer at a flat rate of 30% with a maximum of a £1 million investment per tax year. This means the maximum amount of tax reducer available via this scheme is £300,000.

The limit of £1 million is increased to £2 million if the investor subscribes for shares in a Knowledge Intensive Company.

EIS relief cannot produce a negative liability on an investor’s tax return, the relief can only reduce their tax liability to nil.

There are a number of criteria that a company must satisfy to be eligible for EIS. These are mostly about the size and nature of the business. A full list of the requirements can be found here.

Generally, a company will already be registered under EIS before being advertised to investors. But it is important to note that it is possible to retroactively make an EIS application after an investment has been made. It is the responsibility of the company to make the application and not the investor.

Seed Enterprise Investment Scheme

Investors who subscribe for shares in a qualifying SEIS company will be able to receive tax relief for their subscription. Similar to the EIS relief, the tax relief is given by means of a tax reducer but at a flat rate of 50% with a maximum £100,000 investment per tax year. Therefore, the maximum amount of tax reducer available is £50,000.

SEIS relief cannot produce a negative liability on an investor’s tax return, the relief can only reduce their tax liability to nil.

The SEIS eligibility criteria can be found here.

When can I make a claim for the Income Tax Relief?

  • Claims can only be made when the certificate is issued to the investor by the company. The certificates are known as EIS3 or SEIS3. Certificates are only issued when the trade has been continued for a period of 4 months (SEIS relief also requires at least 70% of the money raised to be spent before the SEIS3 is issued).
  • Both EIS and SEIS relief claims can be made up to 5 years after the 31st of January following the year end of the tax year in which the shares were issued. For example, if the shares were issued in 2021/22 the relief must be claimed by the 31st of January 2028.
  • You can choose to treat the investment as being made in the tax year prior to the actual year of investment.

How do I make a claim?

Tax Return

The amount that you wish to claim for the tax year can be included within your tax return provided that you have the relevant EIS3/SEIS3 certificate. Remember, there are limits as to how much can be claimed for the tax year.

Post

You can complete the claim form on your certificate to show the amount on which you are claiming relief and post it to HMRC at the following address:

PAYE and Self Assessment
HM Revenue and Customs
BX9 1AS

If you are paid through PAYE and have no self-assessment requirement you can also claim EIS/SEIS relief. Similarly, to the above, this can be done via an adjustment to your tax code whereby you complete pages 3 and 4 of your EIS3/SEIS3 certificate and post it to HMRC using the same address as above.

Clawback Relief

Providing that your investment qualifies for EIS/SEIS relief, you must have held your investment for a minimum of 3 years to be eligible to claim the full relief available, otherwise the relief will be clawed back.

You will lose the relief if –

  • You sell some or all of the shares.
  • The company no longer meets the criteria of a qualifying company.
  • You no longer meet the criteria of a qualifying individual.

Clawback of income tax relief gained from the EIS/SEIS is actioned where an investor disposes of their shares within three years of the date of issue, or if the company in which they have invested no longer meets the criteria to qualify as an EIS or SEIS company. Clawback of the relief cannot exceed the original tax reducer (EIS = 30%, SEIS = 50%), which means that if shares are sold at a profit within the three-year window of the issue date, an amount equal to the tax reducer is clawed back.

If the company goes bankrupt and goes into liquidation, there will be no clawback of relief for the investor. This is specifically exempt.

Capital Gains Tax Relief & Deferral Relief

EIS and SEIS investments are exempt from capital gains tax on the sale of shares, providing that the shares have been held for the minimum of 3 years and an income tax relief application has been made in the year of the investment. This is relevant even if the investor did not make any income in the year of investment and there was no actual tax relief claimed.

Deferral Relief enables investors to defer payments of capital gains tax on the disposal of other assets by investing the gain made from the sale into EIS shares (this is not available for SEIS). This relief is available to defer CGT on sales made 3 years before or 12 months after the EIS investment date. The capital gains tax will crystalise on the disposal of the EIS investment or if the investor leaves the UK. It is also worth noting that the EIS deferral relief will carryover if the investment is transferred to a spouse.

Loss Relief

If an EIS or SEIS investment is sold at a loss, further relief is available. The investor will have a choice to utilise the loss (adjusted for Income Tax Relief claimed) against other capital gains in the year of sale or against income by claiming loss relief under Section 131 ITA 2007. The choice will be dependent on the investor’s personal circumstances.

Dividends

Dividends received from EIS and SEIS investments are not exempt from tax and are taxed at regular dividend income tax rates.

Other considerations

An EIS investment qualifies for Business Investment Relief. This enables non-domiciled individuals with offshore assets to transfer “unremittable” money to the UK without incurring a tax charge. This is a complex area and should be discussed thoroughly with a tax professional or investment adviser in advance.

If you are a US taxpayer, you will need to consider whether the tax relief received in the UK will be detrimental to your US foreign tax credit position prior to investing.

 

The contents of this article is not tax advice. For advice on your personal tax situation, please contact us directly.