As businesses look to grow, external investment is often turned to by businesses through the provision of extra capital to fund growth plans. However, many external investors are reluctant to invest in a business unless and until they fully understand the consequences of doing so, which includes the taxation impact of the investment. The Enterprise Investment Scheme (“EIS”) and the Seed Enterprise Investment Scheme (“SEIS”) are tax-efficient government-backed schemes which allow qualifying businesses to fundraise from investors who are tax-resident in the UK.
What is EIS and what are the benefits of it?
EIS was initiated in the mid 90’s to encourage individual investors to invest in small, higher-risk trading companies to help alleviate and deter any problems that smaller, high-risk trading companies have in raising equity finance. EIS is designed to give investors, who subscribe for shares in a business, tax relief on their investment. Investors can claim income tax relief for amounts used to subscribe for new shares in a company, up to an annual investment limit of £2 million for shares issued on or after 6 April 2018 provided over £1 million is invested in knowledge-intensive companies. There are several criteria for a business to qualify as being a knowledge-intensive company, one such criteria being that in at least one of the relevant three preceding years, at least 15% of operating costs of the company consisted of research and development or innovation (R&D) expenditure. In such circumstances, the income tax liability of the investor is reduced by 30% of the sums invested up to the annual investment limit, on the basis the shares are held for at least three years. Additional tax reliefs are potentially available for EIS investors qualifying for some income tax relief on shares, in that exemption from CGT on a disposal of those shares is potentially available provided the shares have been owned for the requisite three years. To ensure qualification is met, companies and investors alike can seek advance assurance from HMRC that EIS applies.
What is SEIS and what are the benefits of it?
Similar to EIS, SEIS is aimed at start-up companies and individual investors who are looking to make equity investments in a start-up company. Investors can claim income tax relief, up to an annual investment limit of £100,000, for funds used to subscribe for new ordinary shares issued by qualifying companies (again, there are several criteria to meet). The investor’s income tax liability is reduced by 50% of the sums invested, up to the annual investment limit (for each investor), provided the shares are held for three years. Further, a SEIS investor whose income tax liability has reduced because of SEIS relief on shares is also potentially entitled to exemption from CGT on a disposal of those shares, on the basis that the shares have been held for three years. Again, to ensure qualification is met, companies and investors alike can seek advance assurance from HMRC that EIS applies.
How can we help?
If you are seeking investment through the EIS or the SEIS route or looking to invest in the same manner, our corporate team can guide you through the entire process. Our expert corporate team will support you in preparing all the documents you need in order to implement the EIS or SEIS investment, which may include a subscription agreement, new Articles of Association and corporate ancillary documents. Please contact a member of our corporate team for further help: Yavan Brar: 07971 588 364 or Chris Gemson: 07799755934 This article reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter. The Seed Enterprise Investment Scheme (“SEIS”) and the Enterprise Investment Scheme (“EIS”) are tax-efficient government-backed schemes which … Read more >
