With EIS/SEIS, the Government has made it easier for startups to get their ideas off the ground by creating highly attractive tax breaks for investors willing to finance disruptive ideas. This creates a win-win scenario – allowing investors to generate attractive returns while helping to kick start the UK economy through supporting entrepreneurs with innovative, high-growth potential.
So what are the benefits for investors:
Income Tax Relief
Under the EIS, 30% of the amount invested in EIS qualifying companies can be deducted from an Investor’s income tax bill in the tax year of investment or, if requested, in the preceding tax year, subject to reducing that bill to zero and to an annual investment limit of £1 million. This is subject to any income tax relief which has already been claimed under the EIS for that year. Under the SEIS, the rate of income tax relief given is 50% and this is subject to an annual investment limit of £100,000. Spouses and civil partners can each contribute up to the limits set out above.
For example: Paul would like to reduce his income tax liability and so decides to invest a sum of £100,000 into SEIS/EIS qualifying companies. Paul will therefore be eligible to receive between £30,000 and £50,000 of income tax relief provided that he is liable to pay at least that sum in income tax.
Capital Gains Tax Relief
When SEIS or EIS investments are sold, the seller enjoys tax-free capital gains on any increase in their value.
For example: Paul has sold an investment and realised a taxable gain of £100,000. Paul has already used his annual CGT exemption. Paul is a top rate taxpayer and is looking to defer the £28,000 CGT liability, so he decides to re-invest his gain and £100,000 is invested into SEIS/EIS qualifying companies on his behalf. The £28,000 CGT liability is not payable until the shares which Paul subscribed for with his £100,000 are disposed of.
Capital Gains Tax wipe-out on gains (SEIS investments only)
Where an Investor has made a gain on the disposal of assets during the tax year prior to investment, 50% of the tax payable on this gain can be wiped out entirely to the extent the gain is invested in SEIS qualifying shares and an eligible claim for SEIS Relief is made in respect of the tax year in which an investment is made.
Capital Gains Deferral Relief (EIS investments only)
Investors who have made a capital gain which is taxable or which was taxed within the last three years can invest the gain in an EIS qualifying company and the capital gains tax can be deferred over the life of the investment or recovered (if already paid). Investors have three years from the date of realising a gain to invest (and the Investor can even reclaim capital gains tax paid in the preceding two years) or can go forward one year from the date on which the Fund invests in an EIS qualifying company. If the Investor dies whilst the money is invested , the tax due on the Investor’s deferred capital gain will die with the Investor. The initial deferral therefore leads (on death) to capital gains elimination. Whilst income tax relief at 30% is limited to the first £1 million invested in any tax year, there is no upper limit on the size of the capital gain that can be deferred after two tax years.
Inheritance Tax Relief
SEIS and EIS qualifying investments also qualify for 100% business property relief from IHT; provided they have been held for at least two years, are still held at time of death and remain unlisted. This means that the value of the shares will fall outside the Investor’s taxable estate and will not be subject to inheritance tax.
If Paul’s shares have been held for at least two years before his death, the investment would, in most cases, qualify for Business Property Relief for Inheritance Tax purposes. For this example we assume that Pauls’ shares are worth £150,000 at the time of his death. IHT relief would be obtained at up to 40% of this value. In this example £150,000 of value passes to Paul’s beneficiaries free of inheritance tax and the estate is also augmented by income tax and capital gains tax saved by the deceased in this example. The estate saved £60,000 in IHT, which would otherwise have been paid; the investment removes £150,000 of taxable value to the benefit of the estate; and if any CGT has been deferred (£28,000 in our previous example) on the original investment this would also fall away on Paul’s death.
If the Investor makes a loss on an investment in any SEIS or EIS qualifying company, the net amount of that loss (after deducting any income tax relief obtained on making the investment) can be offset against the income tax charged in the year in which the loss is made, or can be carried back to the previous tax year. Alternatively, the amount of the loss (after taking into account any income tax relief initially obtained) can be offset against the individual’s capital gains in the tax year in which the disposal occurs, or, if not fully used, against gains of a subsequent year. Tax relief is available at any time in respect of any loss realised upon a disposal of shares in a SEIS or EIS Qualifying Company on which EIS income tax relief or CGT deferral relief has been given and not withdrawn.
For example, it is assumed that Paul’s initial investment of £100,000 is now worth £0. His net loss taking into account his income tax relief (assuming only EIS investments) is £70,000. He is a 45% taxpayer and chooses to offset his losses against his income tax bill. He can reduce his income tax bill by up to £31,500 as his income tax relief rate mirrors his income tax rate.
SEIS and EIS provide investors the security to invest in innovation, while enabling tax reliefs of up to 64% of the capital invested. It is important for entrepreneurs to understand the benefits of SEIS/EIS schemes to investors. This is why many startups have chosen to relocate to the UK.
Blog by Marina Atarova – Co-Founder of Dreamstake an online network, that provides end-to-end support for entrepreneurs wishing to get a startup funded in the shortest possible time. The startup rating system allows entrepreneurs and investors to monitor progress.