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Explaining the Enterprise Investment Scheme and the Seed Enterprise Investment Scheme
by Startacus Admin
Why care about the Enterprise Investment Scheme and the Seed Enterprise Investment Scheme? Kate Jackson, lawyer, tech entrepreneur & EIS /SEIS expert explains all...
"Why should you care about the Enterprise Investment Scheme (“EIS”) and the Seed Enterprise Investment Scheme (“SEIS”)?
Well, if you’re raising investment from friends and family, they might not be familiar with the schemes and you should change that as quickly as possible! It can be used as a great sweetener to hook an investor, and give you more comfort when taking money from mum, dad and your best friend that their exposure is minimised.
This post contains an overview of the key tax reliefs available under EIS and SEIS. The rules are very detailed, so everything can’t be included here, but this will give you a good start.
Under EIS, income tax relief is available at 30% for investments made after 6 April 2011. This means that on a £100k investment, the investor is entitled to £30k tax relief to set against income tax to be paid in the year of the investment. Under SEIS, the rate of relief is even better, at 50%.
There is a “carry back” rule which allows the relief to be carried back a year, which means eligible investors can claim an income tax rebate from HMRC for income tax already paid, or spread the claim over 2 years. Although note that for SEIS, there is no carry back facility for the period preceding 2012/13 as this is when this scheme started.
There are two types of capital gains tax disposal relief. Firstly, if you have claimed income tax relief (above) and you have held the shares for three years, any sale for an increased value will be free of capital gain tax. Without this relief, the investor would be required to pay tax on the gain i.e. the difference between the price they paid for the shares and the price they sold them for. The current rate of capital gains tax is 28% for a high rate taxpayer, so this is a significant bill!
Secondly, under EIS, investors can take advantage of capital gains tax deferral relief. This means a gain can be deferred by reinvesting it into an EIS company. For example, if you sell a second property and the uplift in value is £100k, you would be left with a £28k capital gains tax bill. If you then invest £100k into an EIS company within the requisite time period, you won’t need to pay that bill until you sell those shares. Under SEIS, the position is even better; it’s not a deferral but an exemption for gains made in 2012-2014; these gains never come back into charge.
The other key tax relief is loss relief. Hopefully everything will go well with your venture, but if it doesn’t, your investor can take comfort that any losses they make can be set off against income tax. So on a £100k SEIS investment, where 50% income tax relief has been claimed, their remaining exposure would be £50k. If the shares then dropped to nil value (i.e. if the company went bust), a top rate taxpayer could claim an additional 45% loss relief on that £50k. That equates to another £22,500 in loss relief.
An understanding of the rules is vital for your pitch to investors. Although most savvy and professional investors will know about the rules (and insist on the reliefs being available), in a friends and family round, the people you are approaching are much less likely to be familiar with the scheme."
Kate Jackson is the Founder of EIS-SEIS.comwhich aims in terms of the Enterprise Investment Scheme and the Seed Enterprise Investment Scheme to do one thing quickly, cheaply and effectively for startups: secure advance assurances from the HMRC and deal with all the work and issues around that, so that you can focus on your startup and on getting those investors to sign on the dotted line. She's also the Founder of fab startup TableCrowd and here interview with Startacus can be found here!
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