Essential EIS & SEIS Requirements for Investors and Companies

Understand the key requirements of EIS and SEIS for both investors and businesses to ensure compliance and maximize investment benefits.

Introduction

Navigating the investment landscape can be challenging, especially for startups seeking funding and investors looking for lucrative opportunities. The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are pivotal UK government initiatives designed to foster investment in small, high-growth companies. These schemes offer substantial tax incentives, reducing the inherent risks associated with investing in early-stage businesses. This guide delves into the essential requirements of SEIS and EIS, providing clarity for both investors and companies aiming to leverage these schemes effectively.

SEIS Requirements for Companies

Type of Company

To qualify for SEIS, a company must be unquoted and carry out a qualifying trade. This means the business should not be listed on a major stock exchange, though AIM-listed companies may be eligible.

Size of the Company

SEIS companies must have fewer than £350,000 in gross assets and employ fewer than 25 staff members at the time of investment. These criteria ensure that the scheme targets genuinely small enterprises.

Age of the Company

A startup must be less than three years old, defined from the date of its first commercial sale. This requirement emphasizes support for nascent businesses poised for growth.

Use of Funds

Funds raised through SEIS must be used for growth and development purposes, such as expanding operations or research and development, rather than for purchasing existing shares or specific assets like land.

Maximum Investment

A company can raise up to £250,000 in total through SEIS, allowing for substantial initial funding to kickstart business activities.

EIS Requirements for Companies

Type of Company

Similar to SEIS, EIS-qualified companies must be unquoted with a permanent establishment in the UK and engage in a qualifying trade, excluding sectors like financial services, energy generation, and property development.

Size of the Company

For EIS, the gross assets must not exceed £15 million, with fewer than 250 employees. Knowledge-intensive companies may extend this to 500 employees.

Age of the Company

EIS applies to companies less than seven years old, or up to ten years for those in knowledge-intensive sectors, supporting a broader range of startups and growing businesses.

Use of Funds

EIS funds should be directed towards business growth, including activities like scaling operations, marketing, or developing new products, ensuring the capital contributes to the company’s expansion.

Maximum Investment

A company can raise up to £5 million annually and a total of £12 million through EIS, providing ample resources for medium-sized enterprises to thrive.

Investor Requirements for SEIS/EIS

Residency and Tax Status

While investors do not need to be UK residents, only UK taxpayers can claim the associated tax reliefs, making tax status a crucial consideration.

Income Tax Obligation

Eligibility for tax reliefs is contingent upon the investor paying UK income tax, ensuring that benefits target those contributing to the tax base.

Amount of Investment

Investors can allocate up to £200,000 per tax year under SEIS and £1 million (or £2 million for knowledge-intensive companies) under EIS, allowing significant investment in promising startups.

Holding Period

To retain income tax relief and benefit from CGT exemptions, investments must be held for a minimum of three years, promoting long-term commitment to the company’s success.

Non-Connection Rule

Investors cannot hold more than 30% of a company’s shares, including those held by associates, and must not be employees or directors, maintaining a clear delineation between investors and company management.

Source of Funds

Investors must use their own funds for SEIS/EIS investments, as borrowed capital can disqualify the tax relief, emphasizing the importance of genuine financial commitment.

Tax Reliefs for SEIS/EIS Investments

Income Tax Relief

SEIS offers a 50% income tax relief on investments up to £200,000 per individual per tax year, while EIS provides a 30% relief on investments up to £1 million (or £2 million for knowledge-intensive companies), significantly enhancing the investor’s return.

Capital Gains Tax (CGT) Relief

Investments in SEIS-qualifying shares are exempt from CGT if held for three years, and SEIS also offers a 50% exemption on gains reinvested in other SEIS-eligible shares. EIS similarly exempts CGT on gains from shares held for the requisite period.

Loss Relief

If the investment fails, investors can offset losses against their income tax or CGT liabilities, mitigating financial risk.

Inheritance Tax Relief

Shares acquired through SEIS/EIS qualify for Business Property Relief, allowing them to be passed on free of inheritance tax after two years, adding an estate planning advantage.

Reinvestment Relief

Sales profits from non-SEIS companies can receive 50% CGT relief if reinvested into SEIS-eligible companies, encouraging reinvestment within the high-growth sector.

How to Invest in SEIS/EIS

Investing in SEIS/EIS-qualifying companies can be seamlessly managed through platforms that offer these schemes. It’s crucial to verify that the company has received HMRC Advance Assurance to ensure eligibility for tax reliefs. Engaging with a trusted investment marketplace like Oriel IPO can simplify this process, providing curated opportunities and comprehensive educational resources to make informed decisions.

Conclusion

SEIS and EIS present invaluable opportunities for both investors and companies within the UK startup ecosystem. By understanding and adhering to the essential requirements, businesses can secure vital funding, while investors can enjoy significant tax benefits and support the next generation of innovative enterprises. As the investment landscape evolves, leveraging these schemes effectively can drive growth, foster innovation, and build a robust investment culture.


Ready to take advantage of SEIS/EIS opportunities? Visit Oriel IPO today to connect with UK startups and maximize your investment benefits!

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