The Enterprise Investment Scheme (EIS) offers tax benefits to those investing in new shares of trading companies, benefiting the investor but not the company itself.
The Seed Enterprise Investment Scheme (SEIS) works similarly to EIS but is aimed at helping small, early-stage businesses raise capital by providing tax relief to individuals who buy new shares.
Investors receive income tax relief on EIS investments at 30% (and 50% for SEIS) of their investment during the tax year. Investments can also be carried back to the previous tax year. If you hold your EIS shares for over three years and have claimed and maintained your income tax relief, you’re exempt from capital gains tax when you sell. Additionally, you can defer some capital gains by investing them into EIS shares—there’s no 30% shareholding limit for this deferral.
Company requirements
- For SEIS: The company must be under three years old, have fewer than 25 employees, and assets below £350,000.
- For EIS: The company must be less than seven years old (with some exceptions), have fewer than 250 employees, and assets under £15 million.
- The company can’t be involved in activities like goods dealing (except wholesale/retail), leasing, royalties, property development, farming, forestry, running hotels or care homes, legal/accounting services or energy production.
- Must operate a qualifying trade for at least three years post-investment.
- Cannot be controlled by another company for three years after investment.
- A ‘permanent establishment’ in the UK is required.
- Shares must not be listed on a recognised stock exchange.
Investor requirements
- Must be UK taxpayers.
- Must not be connected with the company.
- Cannot be a director or employee, nor own 30% of shares (directors may invest under SEIS, but not EIS).
- No linked loans or reciprocal arrangements.
- Must invest for genuine commercial reasons, not primarily for tax avoidance.
- If already an investor, all shares must have been issued through EIS/SEIS or upon incorporation.
Share requirements
- Shares must be ordinary, with no preferential rights to dividends or assets, and not redeemable.
- Must be fully paid in cash at issue.
- Shares need to be held for at least three years.
- Must be issued by 6 April.
- Funds raised must be used for the qualifying business within two years.
Investment limits
- EIS: Maximum a company can receive is £5 million per year.
- EIS: Individuals can invest up to £1 million
- SEIS Maximum a company can receive is £250,000, to be used within three years.
- SEIS: Individuals can invest up to £200,000
Setting up a scheme
To set up a scheme:
- Get advance clearance from HMRC before issuing shares (at least two months ahead). The relevant form is here.
- Submit form SEIS1 or EIS1 to HMRC after trading for four months, and within two years of share issue.
- If HMRC agrees all criteria are met, they’ll issue form EIS2 and provide EIS3 forms for investors to claim tax relief.
- Notify HMRC within 60 days if anything changes before the third anniversary that would affect eligibility.
If you would like to discuss this in more detail relating to your business, please feel free to book a free online meeting.
