Are you ready to implement the tax incentive schemes (EIS/SEIS) for your investors?

If you want to attract investment to your company, remember HMRC offers generous tax incentive schemes to your investors – Enterprise Investment Scheme (EIS) is designed to help qualified smaller, higher-risk companies raise capital by giving tax relief to investors. An individual investor can invest up to £1,000,000 (and £2,000,000 into knowledge intensive companies) in any tax year and receive 30% of the amount invested as tax deduction of their income tax bill. Seed Enterprise Investment Scheme (SEIS) is an even more generous scheme offering 50% tax relief on any amount invested up to £100,000. You need to get Advance Assurance approval to enable your investors to claim those benefits.

There are conditions to be met by both the investors and companies.

Conditions for investors

  • Shares must be held for a minimum of three years, if tax relief has been claimed and the shares are sold before the three-year period runs out, the tax relief will be withdrawn
  • Shares must be full-risk ordinary shares, and there must be no arrangements to for the shares to be sold at the end of the relevant period

Benefit for investors

  • Capital gains relief. If investors make a gain when they dispose of the shares in your company, the gain is exempt from Capital Gains Tax (provided they held the shares for at least three years).
  • Loss relief. In the unfortunate scenario that the investors make a loss on their investment when disposing of their shares, they can use the allowable losses to offset their other income/profit, reducing their tax bill. The allowable loss is the total investment loss minus attributable income tax relief.
  • Reinvestment relief. If an investor makes a capital gain elsewhere, they can claim up to 50% of the amount on which you receive income tax relief. For example, the investor makes a net gain of £30,000 by selling a buy-to-let property. They then subscribe £10,000 worth of shares under SEIS. The investor can claim £5,000 in reinvestment relief (50% of £10,000), reducing their taxable gain to £25,000. The investor will also claim the standard £11,700 capital gains allowance, making their final taxable gain £13,300. On top of that, investors can still claim £5,000 (50% of 10,000) income tax relief, that is £5,000 off income tax liability of the relevant tax year.
  • There is a ‘carry back’ facility which allows the all or part of the cost of shares acquired in one tax year, to be treated as though those shares had been acquired in the preceding tax year, giving more flexibility to reduce investors’ tax bill

Conditions for companies

Most trades qualify, but some do not. If your company falls into one of the below listed trades, your company is conducting “excluded activities” and is not qualified. Mostly commonly, if your company is

  • property development
  • providing legal or accountancy services
  • providing services to another person where that person’s trade consists, to a substantial extent, of excluded activities, and the person controlling that trade also controls the company providing the services
  • dealing in land, in commodities or futures in shares, securities or other financial instruments
  • financial activities such as banking, insurance, money-lending, debt-factoring, hire-purchase financing or any other financial activities
  • leasing or letting assets on hire, except in the case of certain ship-chartering activities
  • farming or market gardening

Applying for EIS/SEIS 

Since the EIS/SEIS is administered by HMRC, If you have started the application process or secured approval from HMRC before you present your pitch to potential investors, it will certainly increase your chance of securing the investment.

To start the application process, submit plans to raise money to HMRC through advance assurance scheme, they will advise on whether or not the proposed share issue is likely to qualify. Form to fill is FormEIS(AA), with guidance to fill the form VCM14040.

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