Thursday, April 19, 2012

EIS and SEIS: a comparison

A number of changes were introduced in the new budget. In particular with respect to private equity investment tax reliefs. Now is the time to invest in startups, with two options both very generous when it comes to providing tax relief both for income tax but also for capital gains tax (and especially for high rate tax payers who are the natural target for those schemes).

Enterprise Investment Scheme (EIS)

Here is a summary of the changes some subject to EU State aid approval being granted:
  • The maximum annual amount that an individual can invest under the EIS will be doubled to £1m for 2012/13 onwards. There will no longer be any minimum investment; it was previously £500 in any one company.
  • For shares in investee companies that are issued on or after 6 April 2012, the maximum annual combined amount that can be invested in any one company under these schemes is to be increased from £2m to £5m; the limit on the number of people that can be employed by an investee company under each type of scheme is to be increased from 50 to 250; and the limits on the gross assets an investee company may have are to be increased to £15m immediately before the share issue and £16m after (currently £7m and £8m respectively).
  • For shares issued under the EIS on or after 6 April 2012, loan capital will be disregarded for the purposes of the limit on the proportion of a company’s capital which an investor can hold without being treated as connected with the company; and, subject to conditions, EIS shares will be permitted to carry a preferential right to dividends.

Seed Enterprise Investment Scheme (SEIS)

This new scheme will be similar to the Enterprise Investment Scheme (EIS) but focused on smaller, early stage companies, and will run alongside the EIS. The main features of the SEIS will be as follows:
  • Income tax relief will be available for investment in small companies (i.e. those with 25 or fewer employees and assets of up to £200,000) that are carrying on, or preparing to carry on, a new qualifying business.
  • The relief will be available on share subscriptions of up to £100,000 per individual. It will be possible to carry back relief to the preceding year.
  • The maximum relief will be 50% of the amount subscribed.
  • The shares must be retained for at least three years.
  • The scheme will incorporate many of the requirements of the EIS, for example the requirement that the investor have no more than a 30% stake in the investee company.
  • Any one company will be able to raise investment of up to £150,000 under the SEIS; this will be a cumulative limit and not an annual one.
  • Chargeable gains on disposals of SEIS shares will be exempt from capital gains tax (CGT) provided the shares are held for the requisite three-year period.
  • Chargeable gains realised from disposals of any assets in 2012/13 will be exempt from CGT if invested via the SEIS in the same year. It's not a rollover relief: in other words the gains WILL NOT crystallise when the investment is unwound!

    A quick comparison

    While both EIS and SEIS schemes are similar they are designed for a different market. Here is a quick comparison of the 2 schemes:



    Update 1: Starting with the 13/14 tax year, the CGT relief for SEIS has been cut down from 100% to 50%. Indeed HMRC realised that with such generous reliefs, an investor could find himself in a situation where the relief would be more than 100% of the sum invested!

    Update 2: Also from the 13/14 tax year, the maximum income tax relief available to an individual will be £50,000 or 25% of their income, whichever is greater. However EIS and SEIS are excluded from that cap.

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