EIS & SEIS: Reclaiming tax on investments
EIS & SEIS: Reclaiming tax on investments

For the majority of investors, their main goal is to maximise returns and minimise risk where possible.

Whilst investing into early stage, unlisted businesses is generally considered higher risk, this is often offset by a collection of tax reliefs and incentives that reduce the total exposure while maximising potential upside.

This is possible with the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) – two of the most generous tax incentives when investing into high-growth, early-stage businesses. 

EIS was introduced by the UK government in 1994 in a bid to stimulate entrepreneurship and encourage investment into unlisted businesses. 

While SEIS was introduced later, in 2012, and focuses on even younger and smaller companies than EIS. 

Investing into high-growth SMEs in a tax-efficient way can, potentially, earn investors a high return if the businesses do well. But it’s also philanthropic, as backing small businesses is crucial to the UK’s economy – after all, in 2019, 99.9% of the UK business population was made up of small and medium-sized businesses, and they account for three fifths of the employment and around half of the turnover of the private sector. 

 

What tax reliefs are available with EIS?

When you invest into an EIS-eligible business – which must be unquoted, have less than 250 full-time employees, have gross assets of less than £15 million and be within seven years of its first commercial sale – you can receive the following benefits:

 

Claim back up to 30% of the value of your investment

You can do this through income tax relief. For example, if you made an investment of £10,000, you could save £3,000 in income tax. 

This income tax relief is applicable on a maximum annual investment of £1 million, or £2 million if at least £1 million is invested into knowledge-intensive companies. 

 

Dispose of shares without paying capital gains tax

EIS shares benefit from disposal relief when held for more than three years, so any gains accrued may be exempt from capital gains tax when you come to sell them. 

 

Defer the payment of capital gains tax

You do not have to pay capital gains tax immediately if you use a gain from the sale of any asset to make an investment into an EIS-eligible company. 

You can defer gains of any size, made up to three years before and one year after the EIS investment.

 

Claim loss relief if the business performs poorly

If an EIS-eligible company performs poorly and you lose money on your investment, you could claim loss relief. 

You can claim loss relief at your equivalent rate of income tax. For example, if you pay income tax at a rate of 45%, you could claim up to 45% of your net loss in income tax relief.

 

Pass on your investment free of inheritance tax

After being held for two years, EIS investments become inheritance tax-free.

 

What tax reliefs are available with SEIS?

When you invest into an SEIS-eligible business – which must be unquoted, less than two years old, have less than 25 full-time employees, and have gross assets of less than £200,000 – you can receive the following benefits:

 

Claim back up to 50% of the value of your investment

You can do this through income tax relief on a maximum annual investment of £100,000. For example, if you made an investment of £10,000, you could save £5,000 in income tax.

In order to claim this, you must have sufficient income tax liability, and hold the shares for at least three years.

 

Dispose of shares without paying capital gains tax

You do not have to pay capital gains tax when selling SEIS shares as long as you have held them for at least three years, claimed income tax relief and the company is still SEIS-eligible. 

 

Claim 50% capital gains reinvestment relief

If you reinvest gains from a non-SEIS-eligible investment into an SEIS-eligible business, you could receive 50% capital gains tax relief on the original investments.

 

Claim loss relief if the business performs poorly

If your SEIS investment is realised at a loss, it can be offset against the same or previous year’s income tax.

 

Pass on your investment free of inheritance tax

After being held for two years, SEIS investments become inheritance tax-free.

 

Minimising risk and maximising returns

Last year, the amount of tax relief claimed on investments into unlisted companies and other business assets passed on in estates jumped 64% to £1.4 billion, up from £828 million in the year previous.

Investing into early-stage, high-growth companies is risky, but the tax reliefs afforded by EIS and SEIS aim to offset these extra risks, and if the businesses succeed, the returns could be greater than other, riskier assets. 

A diversified portfolio is also key to minimising risk, which experienced investors will know all too well, having seen the effects the pandemic has had on markets and disrupted business models around the world.

Diversification doesn’t eliminate investment risk completely, but it can help to shelter you when some areas of your portfolio don’t perform as well as others.

In the current environment, a company’s resilience (whether established or at startup stage) will depend on the fundamentals of the business and the fast-changing dynamics of economic activity and consumer behaviour. 

In other words, how adaptable is the company when it comes to change?

The adaptability of smaller, innovative startups is crucial. We’ve seen countless examples of once market leaders breaking down due to their failure to adapt their businesses to the changing times including Kodak, Thomas Cook and Nokia to name a few.

This will only be exaggerated in the wake of COVID-19, where digital solutions have become critical as people and businesses have to significantly reduce contact in the physical world.

A recent national survey has revealed that 72% of UK tech businesses saw an increase in demand for their services between March and August 2020, suggesting tech firms are holding strong despite recent pressures brought by COVID-19. 

Although it is evident technology has been one of the few parts of the UK’s private sector to perform well during the pandemic, many in the industry suggest further investment into the high-growth startups is crucial to ensure economic conditions return to pre-coronavirus levels as soon as possible.

 

Live EIS-eligible investment opportunity

Earlier in September, Growth Capital Ventures (GCV) launched a £1 million EIS-eligible investment opportunity on it’s co-investment platform.

Investment from the current round will enable GCV to support 30 high-growth startups and create hundreds of new tech jobs within the North East through its venture builder unit, G-Labs.

Discover More: GCV Live EIS eligible investment opportunity

 

Now overfunded having received over £1.2 million in investment from institutional and individual G-Ventures members (GCV’s private investor network), there is still time for new and existing investors to participate before the round closes on the Friday 13th November

Read More: View GCV’s investment opportunity

G-Ventures brings together an online and offline investor network of experienced, private investors and institutional investors to access and co-invest in growth focussed investment opportunities.

To date, G-Ventures members have invested over £10 million into high-growth startups through GCVs co-investment platform GrowthFunders – the majority of which have been EIS-eligible investment opportunities. 

As well as this, GCV has facilitated over £45 million of investment into high-growth tech businesses, and have contributed to the creation of over 500 jobs in the past five years.

Craig Peterson, Co-Founder and Chief Operating Officer at GCV, said: “Over the past five years we have been on a mission to support entrepreneurs and innovators to build and launch high-growth businesses that transform industries.”

“The fundraise will not only increase our capacity with further quality hires and expand our venture builder arm but in turn will enable the creation and scaling of the UK’s next wave of innovative tech start-ups.” 

“As consumers and businesses are relying more on technology as a result of COVID-19, we feel this investment comes at the right time to combine capital and intensive support to build better, more sustainable businesses.”

For more information and to download the Investment Memorandum, click here.

 

GCV Investment Opportunity

Share this post

Share on facebook
Share on google
Share on twitter
Share on linkedin
Share on pinterest
Share on email