SEIS & EIS Investment Funds – What Entrepreneurs Need to Know

What are the EIS and SEIS Investment Schemes?

In short, both the EIS and the SEIS are venture capital schemes designed to help smaller companies to raise much-needed capital. As this type of investment is considered high risk, the schemes offer generous tax reliefs to investors as an incentive.

Investors can receive relief on their income tax bills and not be subject to capital gains tax on any gains made. Capital gains deferrals and inheritance tax relief are two other benefits, while loss relief also comes into play should the investment go south.

As you’ll find out below, the two schemes have similar goals but differ in the qualifying companies and the benefits to both parties.

Enterprise Investment Scheme

At the core of both schemes is a significant emphasis on reducing the amount of risk an investor faces when investing in early-stage businesses.

With EIS tax relief:

• Investors can claim 30% income tax relief up to £1 million per tax year (or £2 million per year when investing in knowledge-intensive companies) once EIS shares have been held for at least three years.
• 100% of any gains made from selling EIS shares are not subject to capital gains tax (18% basic or 28% higher).
• Investors can receive capital gains deferral relief when investing gains from the sale of other assets.
• The EIS investment is not subject to inheritance tax as long as shares have been held for two years at the time of your passing.
• If the EIS company fails or losses come from the sale of shares, you can offset some of those losses against your income tax or capital gains tax bill for the current or previous year.

What are knowledge-intensive companies?

UK businesses classified as ‘knowledge-intensive’ receive preferential treatment under the Enterprise Investment Scheme (EIS). These are early-stage, innovative companies focusing heavily on Research & Development (R&D) and the creation of intellectual property, such as businesses developing new drugs or medical treatments.

As they offer higher risk than regular EIS-eligible companies, EIS investors can claim 30% income tax relief on investments up to £2 million instead of £1 million.

Seed Enterprise Investment Scheme

SEIS offers similar tax benefits to EIS, with two significant changes:

• Investors can claim 50% income tax relief up to £200,000 per tax year once SEIS shares have been held for at least three years.
• 50% of any gains made from selling SEIS shares are not subject to capital gains tax.

What Companies Qualify for the EIS or SEIS Investment Schemes?

These investment schemes aim to raise funding for early-stage UK companies, boosting the economy and creating jobs.

EIS Qualification Criteria

• Not be listed on the London Stock Exchange or any other recognised stock exchange.
• Not be controlled by another company.
• Control only qualifying subsidiaries, majority-owned (over 50%) by the parent company.
• Have gross assets of no more than £15 million before issuing EIS shares and no more than £16 million immediately after.
• Employ fewer than 250 full-time staff.
• Maintain a permanent establishment in the UK.
• Not raise more than £5 million in state aid risk finance within a 12-month period or exceed £12 million in total.
• Has been trading for no more than seven years before securing its first EIS funding.

SEIS Qualification Criteria

• Be a UK-based company.
• Engage in a qualifying trade.
• Be less than three years old.
• Have gross assets of no more than £350,000.
• Not be listed on any stock exchange.
• Employ fewer than 25 people.
• Not control another company unless it’s a qualifying subsidiary.
• Never have been controlled by another company.

What is an SEIS or EIS Fund?

EIS and SEIS funds reduce investment risk by spreading investments across multiple early-stage businesses hand-picked by experienced asset managers.

Understanding the Two Types of SEIS/EIS Funds

Active EIS Funds

Led by an asset manager who controls your investment, researching potential EIS investments and using expertise to decide where to invest.

These funds are higher risk but can yield greater rewards, with costs averaging 4% of the initial investment and between 10% and 25% of any profits made.

Passive EIS Funds

Also called ‘Tracker’ funds, these follow a set of rules defining an index, mirroring the investment model of successful UK investors. They are more data-oriented and reduce individual decision-making.

What to Consider Before Choosing a SEIS or EIS Fund

• Diversity: Some funds focus on a single sector, which can be risky. A diverse portfolio is preferable.
• Number of Companies: Look for a fund that spreads investment across at least 8 companies.
• Fees: Balance costs with expertise. High fees can eat into profits, but inexperienced management could lead to losses.
• Investment Horizon: SEIS/EIS funds require long-term commitment, typically at least five years.

Ready to Invest in EIS or SEIS Funds?

Choosing between investing directly in EIS-qualifying companies or opting for an SEIS/EIS fund depends on your expertise and available time. If you’re new to investing, funds can provide a safer, more convenient way to invest while benefiting from tax reliefs.

However, don’t rush into a decision. Take time to research funds, compare their fees, and evaluate potential risks and rewards.