SEIS and EIS Tax Relief: A Guide for UK Startup Investors

Investing in UK-startup companies can be both beneficial financially as well as via generous tax reliefs. The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are government-backed schemes to incentivize investment in startup ventures through offering attractive tax reliefs. Here are the important points that you should know.

What Are SEIS and EIS?

SEIS and EIS are venture capital schemes put in place by the UK government to promote investment in small, high-risk companies. SEIS and EIS grants tax relief to individual investors purchasing new shares in qualifying companies.

• SEIS seeks very early-stage startup companies. Thus, the higher tax relief is provided in view of the extra risk these investors would be taking.
• EIS seeks growth capital from investors in companies that are somewhat more established.

Key Tax Benefits

SEIS Benefits

• Income Tax Relief: Up to 50 percent income tax relief can be claimed on investments of up to £200,000 per tax year.
• Capital Gains Tax (CGT) Exemption: No CGT is payable on any profits generated by shares fully paid for under SEIS for at least three years.
• Loss Relief: Offset losses against income or capital gains.
• CGT Reinvestment Relief: Any gains made from the disposal of assets can be reinvested into SEIS shares, attracting CGT relief at the rate of 50 percent on the amount reinvested.

EIS Benefits

• Income Tax Relief: Claim 30 percent income tax relief on investments up to £1 million per tax year (£2 million for investment in knowledge-intensive companies).
• CGT Deferral Relief: Defers CGT on gains reinvested in EIS shares.
• CGT Exemption: No CGT is to be paid on profits generated from EIS shares held for a minimum of three years.
• Loss Relief: Offset losses against income or capital gains.
• Inheritance Tax Relief: Starting from the second year onwards, EIS shares may qualify for 100 percent relief from inheritance tax.

Eligibility Criteria

To qualify for SEIS or EIS reliefs:

• Investor Requirements:

  • Must be a UK taxpayer.
  • Cannot hold more than 30% of the company’s shares.
  • Cannot be an employee of the company (directors may qualify under certain conditions).

• Company Requirements:

  • Must be unlisted and based in the UK.
  • Must carry out a qualifying trade.
  • For SEIS: Must have started trading within the last two years, have fewer than 25 employees, and less than £200,000 in gross assets.
  • For EIS: Must have fewer than 250 employees and less than £15 million in gross assets.

For detailed guidance, consult HMRC's official documentation on venture capital schemes.

Claiming the Reliefs

Once investment is made, the company will send you a compliance certificate, SEIS3 or EIS3. You may use it to claim your tax relief:

• Self-Assessment Tax Return: Enter the details on your return.
• Carry-Back Relief: You can elect to have some or all of the investment treated as having been made in the preceding tax year, up to annual limits.

Be sure to keep all your documents, and contact a tax adviser as needed.

Risks and Considerations

Investing in start-ups is risk-prone, notwithstanding the appealing tax benefits of SEIS and EIS.

• High Failure Rate: Many start-ups fail; your investment could get wiped out.
• Illiquidity: Shares in private companies are harder to trade.
• Complex Rules: For tax relief, strict compliance has to be met.

Diversify your portfolio and consider seeking professional advice before investing.

Conclusion

SEIS and EIS provide wonderful tax incentives for those able to invest in the UK's vibrant startup ecosystem. With knowledge of the benefits and risks, informed decisions can be made in a manner that stands a better chance for innovation and possibly profits in the end.

Have you seen what your investments may benefit? Just try our salary calculator and explore what it might offer on tax savings and returns.