Enterprise vs Seed Enterprise Investment Scheme - Explained
What are Enterprise Investment and Seed Investment Schemes?
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Table of ContentsIs there Any Difference Between Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS)?Initial Income Tax ReliefCapital Gains Taxes and DefermentLoss ReliefInheritance Tax ReliefCarry BackRestrictions on Benefits of EIS and SEIS
Is there Any Difference Between Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS)?
The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are equity funding incentive programs in England. They seek to incentivize investors to provide capital to small and startup businesses. The EIS aims to help unquoted trading companies (small, high-risk businesses) raise capital by offering tax relief to investors receiving shares in a qualified company. SEIS, similarly to EIS, provides tax incentives to investors to encourage seed investment in early stage, startup companies.
In this article we discuss the various similarities and differences between the two tax schemes.
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Initial Income Tax Relief
Investors in the EIS receive an initial income tax relief of 30% of the investment amount. The 30% tax relief can be claimed on investments up to £1,000,000 in one tax year for individuals or £2,000,000 for married couples. So, the maximum tax reduction in any one year of £300,000. Of course, the investor must have sufficient income tax liability for the deduction to count. The shares must be held for at least three years from the date of issue or the tax relief will be forfeited. People connected with the company are not eligible for Income Tax Relief on their shares. Also, there is no minimum investment through EIS in any one company in any one tax year.
The SEIS receives an initial income tax relief of 50% of the investment amount. The maximum amount of investment is £100,000 per tax year. The maximum amount that a singe company can raise is £150,000.
Capital Gains Taxes and Deferment
Both the SEIS and EIS are not subject to capital gains tax. For the EIS, the shares must be held for at least three years and the income tax relief must have been claimed on them. The EIS has a potentially unlimited and indefinitely deferral of an existing capital gains tax bill. Capital gains taxes are eligible for deferment when the gain is invested in shares of an EIS qualifying company. The gain can come from the sale of any assets. The investment in the EIS must take place between 12 months before and 36 months after the investment. It doesn’t matter if an individual is connected to the company. (Remember, an investor must be unconnected for income tax relief.)
The SEIS reinvestment rules are slightly different, allowing a permanent capital gains exemption for 50 per cent of the investment. Also, chargeable gains made in the 12 months before or three years after the investment are eligible for reinvestment relief. Like the EIS, the exemption is disallowed if the SEIS shares are sold or transferred within three years of issue, or the investor receives value from the SEIS company during the period 12 months before and three years after the issue of the SEIS shares.
The EIS and SEIS provide loss relief. If EIS shares are disposed of at a loss, the investor can elect that the amount of the loss (less any income tax relief taken) offset any income during the year in which they were disposed or of the previous year. With the EIS, there is a maximum exposure of 38.5 pence on the pound for a 45% income tax payer. With the SEIS, there is a maximum exposure of 27.5 pence on the pound for a 45% income tax payer.
Inheritance Tax Relief
Dos the EIS and SEIS provide a potential inheritance tax relief. The potential savings in both schemes is 40 pence on the pound.
For the EIS and SEIS, there is a 'carry back' provision. This allows the all or part of the cost of shares acquired in one tax year to be treated as if the shares were acquired in the preceding tax year. This provides relief from income tax liability in the preceding year. Of course, the maximum investment limits still apply.
Restrictions on Benefits of EIS and SEIS
EIS investors must meet the following criteria:
• An investor can invest up to £1,000,000 in any tax year
• An investor must meet a wealth threshold and be financially sophisticated.
• As previously discussed, the investor must keep their capital in the scheme for a minimum of three years following the investment.
• The investor cannot be connected with the company (30% of voting shares within 2 years before and 3 years after the investment; partners, employees, associates, etc.).
SEIS investors must meet the following criteria:
• The tax benefits are only available to recently incorporated businesses.
• An investor cannot be an employee but can be a director of the company.
• An investor cannot hold more than a 30% stake in the company.
• The business cannot have more than 25 employees or gross assets of more than £200,000.
• The maximum amount to be raised for each company is £150,000.
Both the EIS and Seed EIS is equity only.