This is a guest post by Adam Brodie, Co-Founder of Ignition Financial, an ICAEW firm of CFOs focused on UK Start-Ups and Scale-Ups
The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are hugely important for UK Entrepreneurs and the Investors backing them. Here’s more on what they are and why they’re important:
1. Upside – up to 50% of investment back in income tax relief plus no Capital Gains Tax (CGT) at exit (if shares are held more than 3 years).
2. Downside protection – SEIS and EIS tax reliefs underwrite the investment risk by up to 86.5% of amounts.
3. Internal Rate of Return (IRRs) – a recent Seedrs report showed investors’ IRRs grew to 42% when factoring in SEIS/EIS investment relief, 3x greater than the average IRR of 14% without.
1. Initial investment
Income Tax relief is 50% (SEIS) or 30% (EIS) on the amount invested up to a maximum of £100k for SEIS and £1m for EIS per individual in a tax year.
• An investment of £100k then under SEIS, saves £50k of income tax or £30k under EIS.
• Income tax relief is claimed for the tax year in which the shares were issued, or it can be carried back one year.
• Relief is limited to the extent there is an income tax liability to claim against.
The big one! No CGT to pay if shares are sold more than 3 years after investment.
• An EIS/SEIS investment of £100k in a company and sells the shares 4 years later for £1m, then the £900k gain is tax free.
• This allows for a significant CGT saving of £180k!
If the worst happens and the company does not make it, the investor incurs a loss. The loss on the shares disposed of can be set against the investor’s income or capital gains to reduce his/her tax liability.
This is important for limiting losses on the investment.
• An investor invests £100k into your Start-Up. If the business is wound up, then the investor can obtain £22.5k (SEIS) or £31.5k (EIS) income tax relief on their loss, assuming they are a 45% tax rate payer.
• So including the initial investment relief, total income tax reliefs available of up to 72.5% under SEIS or 61.5% under EIS including the income tax relief claimed after investment.
The amount subscribed for shares in SEIS/EIS companies can be treated as if it was made in the tax year before the investment was made.
• If no prior year SEIS investments were made, your investor can invest up to £200k (max £100k per company) with a saving of £100k (£200k at 50%) on their tax bill.
Investors can claim exemption for 50% of a capital gain realised in a tax year when the proceeds are re-invested in the same tax year in an SEIS qualifying company.
• An investor realises a gain of £100k on a second home, taxable at 28%.
• By investing the same £100k in an SEIS company he/she will also save £14k (50% of £28k) capital gains tax.
• So on this investors risk is underwritten by up to 86.5% (14% SEIS reinvestment relief, 50% initial investment relief and 22.5% disposal loss relief).
An investment in an SEIS or EIS qualifying company should qualify for 100% relief from Inheritance Tax, so long as the investment has been held for two years and is still held at time of death.
Watch the video, The Case for the New Investor, which gives a simple animated description of how SEIS works.
To discuss any of this in more detail, please get in touch with Adam or a member of the Ignition team: firstname.lastname@example.org