Uncover eight lesser-known facts about SEIS and EIS tax relief that can enhance your investment strategy and maximize your tax benefits.
Investing in startups can be both exhilarating and rewarding, especially when you leverage the right tax incentives. The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are pivotal in the UK’s investment landscape, offering significant tax reliefs to investors. While many are aware of their basic benefits, there are several surprising facts about SEIS/EIS investment insights that can further optimize your investment strategy. Here are eight facts that every investor and entrepreneur should know.
1. SEIS/EIS Dominates UK Angel Investments
A staggering 80% of UK angel investments flow through SEIS and EIS schemes. Established in 1992 and 2012 respectively, these schemes have become the backbone of early-stage funding in the UK. According to the UK Business Angels Association, 90% of angel investors utilize SEIS or EIS, making it crucial for startups seeking investment to secure Advance Assurance from HMRC to enhance their attractiveness to investors.
2. Global Companies Can Qualify for SEIS/EIS
Contrary to popular belief, non-UK companies can also benefit from SEIS and EIS if they establish a UK branch or subsidiary. By passing HMRC’s ‘UK permanent establishment test’, foreign businesses can tap into these tax incentives. This opens doors for international startups to access UK investors, provided they meet the necessary criteria and obtain Advance Assurance.
3. Liquidation Preferences Are Possible Without Compromising SEIS/EIS
Typically, liquidation preferences prioritize investors in the event of a company’s sale or liquidation. While SEIS/EIS shares are ordinarily incompatible with traditional liquidation preferences, innovative structuring allows investors to receive preferential treatment without disqualifying the investment from SEIS/EIS benefits. This involves creating different classes of shares that ensure compliance while offering investors a degree of financial protection.
4. EIS Offers Long-Term Tax Benefits Beyond Seven Years
Many believe EIS tax reliefs are limited to the first seven years of a company’s operations. However, EIS can extend beyond this period, allowing companies that have previously raised EIS funds to continue benefiting from the scheme until they reach the HMRC limit of £12 million, or £5 million within any 12-month period. This extended timeframe provides sustained support for growing businesses.
5. Restarting the SEIS/EIS Clock with New Business Activities
If a mature company embarks on a new line of business, it can reset its eligibility for SEIS/EIS. HMRC considers the new activity as a startup venture, allowing the company to raise fresh funds under these schemes. This flexibility enables established businesses to innovate and expand without losing access to vital tax incentives.
6. SEIS Allows Repayment of Founders’ Personal Loans
Under SEIS, founders can repay personal loans they’ve extended to their businesses. This is not permissible under EIS. Founders often invest their own capital to kickstart operations, and SEIS provides a mechanism to reimburse these personal loans, enhancing the financial flexibility of startups and aligning founder interests with those of investors.
7. EIS Enables Repayment of Third-Party Loans Used for Trade
While EIS does not allow repayment of personal director loans, it does permit the repayment of third-party loans used explicitly for trading purposes. This ensures that funds are utilized effectively for business growth rather than non-essential expenditures, maintaining the integrity of EIS investments and supporting sustainable business practices.
8. Many Tech Startups Qualify as Knowledge Intensive Companies
A significant number of UK tech startups are eligible as Knowledge Intensive Companies (KICs), often without realizing it. KIC status allows these companies to raise almost double the lifetime funding limit under EIS (£20 million compared to £12 million) and extends the fundraising window to ten years. Criteria include substantial investment in innovation, creation or use of intellectual property, and employing a highly educated workforce, making it easier for tech-driven businesses to access enhanced SEIS/EIS benefits.
Understanding these lesser-known aspects of SEIS and EIS can profoundly impact your investment decisions and strategies. By leveraging these insights, both investors and startups can maximize their benefits, driving innovation and economic growth in the UK.
Are you ready to take advantage of SEIS/EIS investment insights and connect with promising UK startups? Join Oriel IPO today and revolutionize your investment opportunities.
