Business investors are primarily seeking ways to make tax-friendly investments. Most of the in-the-know investors expand their investment portfolios with either of the investment schemes, SEIS or EIS company.
The UK government recognized the difficulties faced by the early-stage businesses with regards to increasing the finance needed for growth. These schemes are launched by the UK government to give a tax relaxation to investors. The investors are offered a tax break by investing in high-risk businesses in the initial stages. To begin with, let’s get a brief introduction of SEIS and EIS. SEIS is an abbreviation for Seed Enterprise Investment Scheme, whereas EIS is an abbreviation for Enterprise Investment Scheme.
To appear attractive concerning the startup in the view of the investors, you can utilize the SEIS and EIS. People are expected to invest in the startup business if they are aware. It will make them SEIS and EIS eligible. Hence, this is the precise reason the government launched these schemes. It is a partial way of supporting SMEs in the United Kingdom. The UK government discovered the gap in the market. One of the obstacles for the startups was getting sufficient funds to expand. Therefore, they created SEIS and EIS.
To understand the advantages of SEIS and EIS schemes, you need to ensure that the company and shares are eligible for the SEIS and EIS. In addition, you also need to ensure you are suitable for the initiatives. This is the prerequisite because you may not be receiving the tax breaks you are anticipating. To check your eligibility, a company must fulfill the following conditions:
- Trade must be less than two years under the SEIS or seven years under the EIS.
- Have no greater than £200,000 total assets or £ 1500,0000 for the EIS.
- Have less than 25 employees under the SEIS or 250 employees under EIS.
Criteria for Both SEIS and EIS
- The company must trade through a UK permanent establishment.
- Unquoted status: At the time of issuance of shares, neither they nor any of the company’s other debentures or shares or other securities may be quoted.
- Trading: Either the company or one of the qualifying subsidiaries should exist to perform a qualifying trade that involves a qualifying business activity.
- The time limit for using the funds: The money raised by the share issue must also be used for the trade in the three years if the shares are issued for SEIS and two years for EIS investment.
- Control and independence: Any subsidiaries managed during the qualifying duration must be qualifying subsidiaries. The issuing company must not be a subsidiary itself.
Seed Enterprise Investment Scheme (SEIS)
The government of the UK introduced the Seed Enterprise Investment Scheme (SEIS) in 2012 with the purpose to gain more investors interested in investing in UK-based businesses. It operates by giving tax relief to the investors who are qualified for the SEIS. However, they are required to subscribe to shares in the eligible companies. To assess the eligibility of the company for the SEIS, investors or companies can contact Her Majesty’s Revenue and Customs (HRMC) to discover.
Benefits of the SEIS:
The tax relief may raise to 64% with the SEIS scheme. The following conditions will apply:
- Higher Income Tax Relief of 50% against the invested amount.
- Capital Gain Tax (CGT) exemptions on any gains from the sales of the shares if they have gained shares for three years.
- CGT writes off 50% of the investment amount in the same tax year.
- Shares are typically inheritance tax (IHT) free, provided if the shares are held for an early duration of about two years.
- If shares are sold at a loss, investors can offset this against CGT or Income Tax.
- The investor can return part of all the investment in the next year they invested.
Additional Criteria for SEIS:
- The trade must be less than two years old at the issuance time, and the company must not have undertaken any other business before this.
- Gross assets: The company must have gross assets of less than £200,000 at the issuance time of shares and lesser than 25 full-time employees.
- The company should not have had any investment from venture capital trust (VCT) or issued any shares which have submitted an EIS compliance statement.
- Investment Limit: Companies are not permitted to increase more than £150,000 under the SEIS.
Enterprise Investment Scheme (EIS)
Enterprise Investment Scheme (EIS) is like the SEIS, but it assists established companies. The goal of the EIS is also the same, to attract more investors. EIS companies provide a certain type of tax relief to investors. They may be direct investors or those via an EIS fund or portfolio service. Additionally, it must be an EIS eligible company invested in by an EIS-qualified investor.
EIS was launched in 1994 and is structured in such a way as to help grow the established companies. On the contrary, SEIS targets small companies which are only in their early stages. The motivation of the UK government was that the startups could use the SEIS at the evidence of concept stage. Later they move to the EIS when they reach the seed stage.
Benefits of the EIS
Enterprise Investment Scheme (EIS) offers the following great benefits
- Capital Gains Tax (CGT) exemption is provided to the sales of shares, guaranteeing the investor kept them for at least three years.
- Shares can be offset against Income Tax or CGT if sold at a loss.
- The shares must be held for two years, and then they are typically inheritance tax (IHT) free.
- There is a possibility to defer all the investment against CGT incurred either up to one year earlier or three years after disposal.
- There is a possibility to take back some or all the investment in the next year of acquisition.
Additional Criteria for EIS:
- Gross assets:
- Less than £ 15m right before the issuance of the shares
- £ 16m right after the issue
- less than 250 full-time employees.
- Financial health: The company must not be in rocky states at the date of issuance of shares.
- Property Managing Subsidiaries: If the company has a property management subsidiary, then it must be a qualifying 90% subsidiary of the company.
- Investment Limit: Companies are not permitted to increase more than £ 5 m in total in any 12-month duration from the venture capital schemes.
Difference Between SEIS and EIS
EIS companies are focused on the later-stage businesses, whereas SEIS concentrates on the initial stage companies. Through SEIS, initial-stage businesses can attract up to £ 100,000 per tax year. The investor may get a 50% tax break through SEIS and can also be exempted from capital gains tax on profits from sales shares. However, they have to wait three years to trade their shares, whereas EIS emphasizes medium-sized startups. The investor would invest up to £ 1 million per tax year. This can offer a 30% tax break and give the same benefit as the SUIS of capital gains tax exemption on share sale profits. Likewise, they are required to keep the shares for at least three years.
Startups seeking investors for money can become more available if they qualify for SEIS or EIS. The tax relief for investors can be a great advantage for the growth of the company. It is important to research both the investment schemes and choose the most beneficial one for your company. It is critical to ponder that the SEIS investment offers more tax relief, primarily because it is riskier than the EIS.
Some companies can qualify for both EIS and SEIS. In such a case, the first investors will gain SUIS, and when the allowance is up, the remaining investors will get EIS. You’ll get a confirmation email notifying you are qualified for EIS or SEIS.
Key Takeaway
If you are confident and are well-versed, SEIS and EIS are remarkable ways of attracting investors. Entrepreneurs and growing companies can use such investment schemes to increase investment. Investors enjoy the investment schemes’ benefits for tax breaks. The investment can help raise money, which is a healthy outcome for the investors. Investors expect to reach the company website and locate the investor relations section. For startups and potential investors, it’s essential to know about these schemes. Investor Relations (IR) is an integral component of any corporate platform, along with the rest of the ‘Big 4″. The other parts of the big 4 include About Us, Public Relations (PR), and Employment.
To ensure investors research your site, make sure the content and layout are professional and trustworthy. This suggests you need to provide the correct details on your website and ensure the design is engaging. Web development companies can make high-quality designs and layouts for your company website. Lastly, you are the captain of your ship, so make sure you choose the appropriate investment schemes for your company to gain the most benefits.