If you’re looking to invest in a start-up company, you should consider whether your investment qualifies for the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS). In this article, we’ve shared the benefits and how to qualify.

What are the EIS and SEIS schemes?

The EIS and SEIS schemes are government incentives designed to encourage investment in early-stage or start up, small- and medium-sized unquoted trading companies. Both of these schemes offer tax reliefs to individual investors, who buy new shares in one of these qualifying companies. At one stage, the two reliefs were scheduled to be withdrawn after 5 April 2025. However, in the 2024 Autumn Budget, it was announced that the investment window (or ‘sunset clause’) had been extended by a further 10 years to 5 April 2035.

Qualifying companies

For a company to qualify for EIS relief, it must be an unquoted trading company (listing on AIM counts as unquoted), with with a permanent establishment in the UK, meet financial health requirements, and not be under control of another company.

The company’s gross assets must also not exceed £15million before the issue, and £16million after the issue. Furthermore, the company cannot have 250 or more full-time employees, increasing to 500 or more full-time employees for knowledge intensive companies.

The conditions are stricter for a company to qualify for SEIS relief, as assets cannot exceed £350,000 and the number of full-time employees must be fewer than 25.

Qualifying investors

To be a qualifying investor, you must subscribe for the shares and you must not be connected with the company for two years prior to issue and until three years after.

You are connected with the company if:

• You, or an associate (broadly defined and including relatives), is an employee of the company. However, you can be a director and still be a qualifying investor provided either (a) you were unpaid for two years prior and three years after the issue, or (b) you were not connected before the issue and became a director after the issue receiving reasonable remuneration; or

• You hold more than 30% of the ordinary shares or can exercise more than 30% of the voting rights or are entitled to receive 30% of the assets of the company (according to a special definition).

What are the benefits of EIS and SEIS for investors?

Income Tax relief

Income Tax relief is given via a reduction of your tax liability, of an amount equal to 30% of your investments in qualifying EIS companies, with a limit of £1million of investments per tax year. This limit is increased to £2million per tax year for investments in knowledge-intensive companies. The tax reducer is increased to 50% of qualifying investments in SEIS companies, although the limit per tax year is much lower at £200,000.

The relief can reduce your tax liability for the year investments are made, or the previous year, to nil, but can never exceed your tax liability for the year so as to create a loss. However, if the shares in qualifying EIS or SEIS companies are disposed of within three years, there will be a ‘clawback’ of the tax reduction, of an amount equal to the disposal proceeds multiplied by the original rate of relief (either 30% or 50%), up to a maximum of the original tax reduction.

Capital Gains Tax (CGT) reliefs

For EIS shares, you can defer a capital gain made on any asset by reinvesting the disposal proceeds into qualifying EIS shares, so long as the reinvestment is made between 12 months before and 36 months after disposal. The deferred gain will subsequently become chargeable on the earliest of:

• Disposal of the EIS investment;

• The company breaching any of the conditions for being an eligible EIS company; or

• You becoming non-UK resident.

For SEIS shares, reinvestment relief is available, on 50% of the investment which qualifies for income tax relief, capped at £50,000. In this case, a gain made on the disposal of any asset can be reinvested into qualifying SEIS shares in the same tax year, and 50% of the available SEIS expenditure becomes a tax-exempt gain (not just a deferral). The available SEIS expenditure is the lowest of:

• The gain;

• The amount reinvested on which SEIS income tax relief is claimed; or

• A specific amount claimed.

Furthermore, if the EIS or SEIS shares are held for at least three years, and income tax relief was obtained on the original investment, any gain upon disposal of the shares will be exempt from CGT.

If a loss is made on disposal of the shares, the loss (less any income tax relief received) can be offset against your net income for the year, reducing your taxable income and therefore your liability.

What should you do?

If you’re considering investing into a company that may qualify for EIS or SEIS, you should get in touch for advice on the interaction and availability of these reliefs and assisting with making the correct claims via your self-assessment tax return or using forms EIS3 or SEIS3.