SEIS and EIS Tax Relief Schemes
When forming a company and putting in place the required legal documentation that supports your company structure, it is worth thinking about the future funding needs of the business. The majority of startups will at some point seek external investment, with the first round of investment typically being referred to as seed or pre-seed funding.
These early rounds of funding usually come from friends and family or wealthy individuals known as Angel Investors. Startup companies in the UK wishing to attract investment should always explore the possibility of offering “SEIS” or “EIS” relief to potential investors.
SEIS (Seed Enterprise Investment Scheme) and EIS (Enterprise Investment Scheme) are initiatives designed to give extremely attractive tax incentives to individual investors in smaller, younger companies.
These companies can often struggle to find investment because they are (justifiably) seen as gambles. So, these schemes were set up to bring together wealthy individuals sitting on excess capital and start-up businesses short on funding.
(S)EIS investments give UK taxpayers substantial income tax relief on the total amount they invest and are exempt from capital gains tax on disposal.
However, because the potential tax relief is so great, (S)EIS investments are subject to tight restrictions and conditions in respect of (i) the company; (ii) the individual investor, and (iii) the nature of the shares issued.
HMRC and the government – wishing only to incentivise investments that individuals would perhaps not otherwise make – have ensured that any such investment opportunity is sufficiently “at risk”. So, for example:
The shares issued must be ordinary shares, with no preferential rights to dividends or assets on liquidation;
The company must be of a limited size (i.e. holding gross assets below a certain value and having a maximum number of employees);
The company must carry on a trade which is deemed to be sufficiently high risk (with various supposedly low-risk trades specifically excluded from eligibility);
The investor (subject to certain exceptions) cannot be “connected” with the company (e.g. by way of employment or existing shareholding);
Investment under a convertible loan arrangement (i.e. where an investor could be repaid his investment) is ineligible for relief;
The investor must generally hold onto the shares for a period of three years in order to enjoy the full benefit of the available reliefs; and
The investment must be made within 2 years of the company’s first commercial sale (in the case of SEIS) or within 7 years (in the case of EIS).
In the light of this far-from-exhaustive list of restrictions, it is vital that start-up companies are set up to avoid being disqualified from offering (S)EIS relief to its investors – a relief which is arguably the principal driving force in angel investment networks throughout the country.
Dragon Argent work with many clients who are (S)EIS eligible and planning to raise investment in 2021. If you are an investor interested in being introduced to startup companies, please contact James Taylor on the details below.
Similarly, if you are a founder keen to ensure you can offer the most attractive investment opportunity possible, Dragon Argent can help you apply for advanced assurance and introduce to our network of investors, so please do get in touch.