Marshall Sterling

Enterprise Investment Schemes

Supporting and empowering British Businesses

What is the Enterprise Investment Scheme

The Enterprise Investment Schemes (EIS) and the Seed Enterprise Investment Schemes (SEIS) are investment schemes designed to encourage investment in small or medium sized companies.
The government schemes do this by offering tax reliefs to individual investors who buy new shares in a company.

To access the scheme, an investor needs to invest in the shares of a small, unlisted company.
Small means 250 employees or less, and maximum gross assets of £15 million (before the investment).
Unlisted means that the company is not quoted on a major stock market, although it can be quoted on a market for smaller companies.

Investing in small companies is generally riskier than buying shares in larger well-known companies and when companies are not listed on a stock exchange, it is often more difficult or impossible to sell the shares.

With a small company, an investor is generally more likely to lose their money, but there is also scope to make significantly increased returns on an investment.

Enterprise Investment Scheme (EIS) tax breaks

The UK government set up the Enterprise Investment Scheme in 1994.

Today, it offers a number of tax breaks to investors who buy shares in small, private companies.

An investor can receive income tax relief of 30 per cent claimed on investments generally up to the value of £1mn, so for example if you invest £10,000 in a company that is eligible for EIS, you can reduce your income tax bill by £3,000 in the year that you invest.

You’ll also pay no capital gains tax on any profits made from an EIS investment.

For example, if you invest £10,000 and five years later sell your shares for £20,000, you’ll get the full benefit of the £10,000 profit, saving you £1,800.

If you make a loss on your investment, you can offset that loss against income tax.
For example, let’s say you lose your entire £10,000 investment.
Because of income tax relief, your actual loss can be deemed as only £7,000 (£10,000-£3,000).

You can, if you choose reduce your taxable income for the year in which you disposed of the shares by £7,000, resulting in a saving of £2,800 (40 per cent of £7,000). Note this example is based on a higher-rate taxpayer. 

If you want to offset your loss against other capital gains in the normal way, you can do this instead.
There’s also no inheritance tax to pay on shares bought through EIS.

To be eligible for EIS reliefs, you generally have to hold the shares for at least three years before selling them.
There’s a few more considerations.
You still have to pay tax on any dividends however many small private companies don’t pay dividends.

There are certain restrictions as to what kind of business you can invest in (it can’t be a bank or a nursing home, for example).
You also can’t be connected to the company or have a stake of more than 30 per cent of it.
You can invest a maximum of £1 million each year through EIS.

Seed Enterprise Investment Scheme (SEIS) tax breaks

The Seed Enterprise Investment Scheme is much newer than its parent initiative, EIS, having been set up in 2012.

It is very similar to EIS but designed for investing in even smaller companies and provides even more generous tax breaks.

While the maximum workforce and gross assets allowable under EIS are 250 staff and £15 million respectively, SEIS has lower limits of 50 staff and £200,000 gross assets.

Businesses must also be less than two years old (there are no age restrictions under EIS).

The tax breaks are as follows:
Income tax relief is 50 per cent, not 30 per cent. So, you get £5,000 off your income tax bill for investing £10,000 under SEIS.

As with EIS, there’s no capital gains tax to pay on profits, no inheritance tax, and you can claim loss relief in the same way. See above for details.

There is an extra relief called capital gains reinvestment relief. This is useful to you if you have recently paid capital gains tax on other investments as you can reclaim up to 50 per cent of the tax paid if you reinvest that money into SEIS.

The tax reliefs available through SEIS are so generous that for the 2012/13 tax year, they added up to a potential 100.5 per cent of your investment in a situation where that investment was a complete failure. In other words, you literally could not lose provided you had paid enough tax to offset your SEIS investment against.

However, the downside protection has fallen 86.5 per cent, so you’ll get back £8,650 from a £10,000 investment that totally fails provided you pay enough tax to use all the reliefs.

It needs to be noted that even the maximum relief rate of 86.5% is only for those who are have a sufficiently large additional rate 45% tax bill to offset the loss against and the maximum you can invest through SEIS in any tax year is £100,000.

If you are interested in benefiting from SEIS/EIS investment opportunities, please fill in your details below and we will add you to receive EIS information on new and existing projects.

A member of our team can also contact you by phone to provide more information if required.

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