The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) have been created to help start-up businesses to raise investment by providing a variety of tax reliefs to individual investors who acquire new shares in those firms.
These relief schemes are generally awarded to small, not public and trading companies’ investors, especially on income and capital gains taxation.
However, it offers greater benefits, e.g., a tax credit equal to 50% of the funding that differ from the 30% of the EIS.
These advantages can be summarised into:
- Income Tax Relief: results in a tax deduction for the year in which the investment has been purchased. This relief goes from a minimum of £5 up to £1,000,000. Participation must be maintained in the portfolio for an at least three years and, if the investment is sold earlier than this limit, the benefits provided is are lost and there is the obligation to repay the amount deducted.
- Capital Gains Tax Exemption: the capital gains from the sale of participation EIS/SEIS are exempt from CGT, if the investment has to be held for at least three years;
- Capital Gains Tax Deferral Relief: there is a taxation relief of capital gains from the sale of any assets when they are reinvested in investments EIS/SEIS. Suspension of taxation operates until the sale of the investment.
It is imperative that investors are conscious of the rules that the firm has to comply with, not simply at the instant of the investment but for at least three years after that date. If it fails to fulfil these rules, the tax relief will not be awarded and, if already granted, will be withdrawn. Thus, it is vital that a company respects these requirements, to not mislead its investors on assuming that these qualify tax relief, only to discover that they do not.
Furthermore, both investors and companies should note that no relief will be granted (or if it has been given, it will be withdrawn) if any scheme has as its primary purpose, or one of its main objectives, the avoidance of tax.