EIS and SEIS tax reliefs
Early-stage investing carries real risk: many startups fail, money is tied up for years, and a return is never guaranteed. To encourage people to back young companies anyway, the UK government offers two tax-advantaged schemes. This month covers what they give you, and where they fit in a decision.
Why these schemes exist
Young companies drive innovation, jobs and growth, but they struggle to raise money: little trading history, few assets, and a higher chance of failure. The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) help compensate investors for taking that risk. In effect, the government shares some of it by offering tax incentives to people who back qualifying businesses.
Both schemes can reduce the upfront cost of an investment, protect part of your downside if the company fails, and let successful investments produce tax-free gains. SEIS is aimed at the very earliest companies. EIS supports slightly more established businesses raising to grow.
SEIS
- Seed and very early stage
- Income tax relief: 50 percent
- Max annual investment for relief: £200,000
- Minimum holding period: 3 years
- Gains on qualifying shares usually tax-free
- Loss relief potentially available
- CGT reinvestment: 50 percent of the qualifying amount may be exempt
EIS
- Early stage and growth
- Income tax relief: 30 percent
- Max annual investment for relief: £1 million, or up to £2 million with at least £1 million in knowledge-intensive companies
- Minimum holding period: 3 years
- Gains on qualifying shares usually tax-free
- Loss relief potentially available
- CGT on a reinvested gain can be deferred
These are investor limits. Separate limits apply to the company receiving the investment. For example, a company can currently raise a maximum of £250,000 through SEIS.
Relief on the way in, and on the way out
1. Income tax relief
The most immediate benefit is a cut in your income tax bill. SEIS gives 50 percent of the amount invested, EIS gives 30 percent.
- SEIS: invest £10,000, claim £5,000, net cost £5,000
- EIS: invest £10,000, claim £3,000, net cost £7,000
- Relief cannot exceed the income tax you owe
- Claim in the year the shares are issued, or carry back to the previous year, within the annual limits
2. Tax-free capital gains
If the company succeeds and the shares rise, any gain on qualifying SEIS or EIS shares is normally free of Capital Gains Tax.
- You must have received and kept the income tax relief, held the shares at least 3 years, and continued to meet the conditions
- Example: invest £10,000, sell later for £50,000, the £40,000 gain can be CGT-free
- Dividends are not tax-free, though early companies rarely pay them
3. Loss relief
If the investment is sold at a loss or the shares become of negligible value, you may offset the remaining loss (after income tax relief) against income or gains.
- EIS, additional-rate taxpayer: £10,000 in, £3,000 relief, £7,000 at risk, loss relief at 45 percent is £3,150, effective net loss £3,850
- SEIS, same taxpayer: £10,000 in, £5,000 relief, £5,000 at risk, loss relief at 45 percent is £2,250, effective net loss £2,750
- It reduces the impact of a failure. It does not remove it – you still lose money
Putting an existing gain to work
4. SEIS reinvestment relief
If you have a taxable gain from selling another asset and reinvest it in qualifying SEIS shares, you may exempt from CGT an amount equal to 50 percent of the qualifying SEIS investment.
- Example: a £20,000 gain, reinvest £20,000 in SEIS, exempt £10,000 from CGT
- Because SEIS relief applies to up to £200,000 a year, the maximum gain that can benefit is £100,000
- This is an exemption, not a delay, provided the conditions continue to be met
5. EIS deferral relief
If you make a taxable gain and reinvest it in qualifying EIS shares, the CGT can be postponed rather than exempted.
- The EIS investment must generally be made between 1 year before and 3 years after the gain arose
- Unlike the SEIS exemption, the deferred gain usually comes back into charge later, for example when the EIS shares are sold or cease to qualify
- It still helps: it delays the tax and frees up capital in the meantime
What you must do to qualify
The detailed rules are complex, but the main investor requirements include the following.
Investor conditions
- Newly issued, fully paid shares, generally paid for in cash
- Shares genuinely at risk, with no arrangements to protect your capital
- You and your associates must not control more than 30 percent of the company
- Hold the shares for at least 3 years
- Do not receive prohibited value or benefits from the company
- Particular restrictions apply to employees and paid directors, though some angels who become directors can still qualify
The company matters too
The company must keep meeting the scheme conditions after you invest. You can lose relief because of something the company does later, not only because of your own actions.
What it means
- Many startups apply to HMRC before a round
- It indicates that, on the information provided, HMRC considers the proposed investment likely to meet certain scheme requirements
- It can give investors more confidence
What it does not mean
- Not an endorsement of the company
- Not confirmation that it is a good investment
- Not a substitute for due diligence
- Not an unconditional guarantee that relief will be available
How to claim, and where relief fits
How to claim
- The company issues the shares and completes the HMRC compliance process
- Once authorised, it gives you an EIS3 or SEIS3 certificate
- You claim through Self Assessment, or ask HMRC to adjust
- Relief is not immediate – there is a delay while the company completes the steps
Records to keep
- The EIS3 or SEIS3 certificate
- The share subscription agreement
- Evidence of payment
- The share certificate or nominee statement
- The share issue date
- Relevant correspondence with the company or platform
Get the order right
SEIS and EIS are powerful tools. They can lower the upfront cost, protect part of the downside and make successful exits more tax-efficient. But they are a way to mitigate risk, not an investment strategy. Work in this order:
1. Decide whether the company is an attractive investment. 2. Do appropriate due diligence. 3. Assess whether the valuation and terms are reasonable. 4. Confirm the expected SEIS or EIS eligibility. 5. Consider how the relief applies to your personal tax position.
Never let the availability of tax relief turn an investment you would otherwise reject into one you are prepared to make.
This lesson is for educational purposes and does not constitute tax, legal or investment advice. Tax treatment depends on individual circumstances and may change. Consult a suitably qualified tax adviser and review the latest HMRC guidance on venture capital scheme reliefs before investing.
Quiz · EIS and SEIS
Question 1 of 5
Purpose
What is the main purpose of the EIS and SEIS schemes?
Correct: B. The schemes exist to encourage private capital into young, higher-risk UK companies by sharing some of the risk through tax incentives.
Quiz · EIS and SEIS
Question 2 of 5
SEIS relief
What rate of income tax relief may an eligible investor claim on a qualifying SEIS investment?
Correct: D. SEIS offers 50 percent income tax relief on up to £200,000 invested per tax year. EIS offers 30 percent.
Quiz · EIS and SEIS
Question 3 of 5
Advance assurance
Which statement about HMRC advance assurance is correct?
Correct: C. Advance assurance indicates the investment is likely to qualify on the information given. It is not an endorsement, a guarantee, or a substitute for due diligence.
Quiz · EIS and SEIS
Question 4 of 5
Holding period
How long must investors generally hold qualifying EIS or SEIS shares to retain the available reliefs?
Correct: C. Shares must generally be held for at least three years to retain the income tax and capital gains reliefs.
Quiz · EIS and SEIS
Question 5 of 5
Judgement
Which statement best describes how tax relief should influence an angel investment decision?
Correct: B. Assess the company on its merits first. Tax relief mitigates risk, it does not make a weak investment a good one.
Month 4 complete. Nice work.
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