Tax Reliefs On SEIS and EIS Investments
For experienced investors, the main appeal of SEIS/EIS is the chance to invest in the newest and most exciting businesses with the added benefit of tax relief:
- Up to 50% SEIS and 30% EIS income tax relief, either against this year’s tax bill, or last years via a carry back facility.
- Ability to defer capital gains made elsewhere, by investing these in an EIS.
- Tax-free growth – no Capital Gains Tax liability if your investment does well
- Loss relief – if an investment does not work out, it’s possible to offset losses against income or capital gains tax.
- Inheritance tax free, provided the investment is held for at least two years and you still hold it on your death.
The tax advantages are significant, but you should make your decision to invest based on the merits of the investment itself, not the tax benefits, given that it will be a risky investment. Tax rules can change, and tax benefits depend on individual circumstances. To retain the tax benefits of an SEIS or EIS investment you need to hold it for at least three years and the investment must remain qualifying.
How EIS tax relief helps reduce any losses and magnify any gains
Below is a summary of the tax relief on various scenarios of EIS. (For SEIS the income tax relief will be 50%.)
When you invest £100,000 in an EIS, because of the income tax relief of up to 30%, the effective net cost could be as little as £70,000. The table below gives examples of how that – and loss relief – might affect your returns whether your investment does well or badly.
Loss relief allows you to write off any losses against your taxable income. So, if your investment falls to zero you could in effect deduct the £70,000 loss from your taxable income. This gives a potential tax saving of £31,500 for a 45% taxpayer and means the maximum effective loss could be as little as £38,500 (effective cost of £70,000 less loss relief of £31,500). Meanwhile, if your investment grew by 50%, thanks to the tax relief, you could be looking at an effective gain of 80%.
| Investment falls to zero | Investment falls by 50% | Investment has no growth | Investment grows by 50% | |
| Initial investment | £100,000 | £100,000 | £100,000 | £100,000 |
| Net cost of investment | £70,000 | £70,000 | £70,000 | £70,000 |
| Investment value on realisation | £0 | £50,000 | £100,000 | £150,000 |
| Effective gain/loss after tax reliefs | (£38,500) | (£11,000) | £30,000 | £80,000 |
| Effective gain/loss after tax reliefs | (38.5%) | (11%) | 30% | 80% |
How do EIS and SEIS tax reliefs compare?
| Maximum investment | Income tax relief | CGT relief / deferral | Tax-free dividends | Tax-free growth | IHT relief | Loss relief | |
| EIS | £2,000,000* | 30% | deferral | no | yes | after 2 years | yes |
| SEIS | £100,000 | 50% | 50% relief | no | yes | after 2 years | yes |
* Provided anything over £1,000,000 is invested in knowledge-intensive companies.
Tax benefits depend on circumstances and tax rules can change. The above table is a brief outline only: there are more detailed conditions and rules which you should consider carefully before investing.
SEIS
An investor can invest up to £100,000 each tax year in qualifying SEIS investments. There is a lifetime cap of £150,000 on the amount that an eligible company can raise through SEIS.
EIS
An investor can invest up to £1m per tax year in EIS investments, or £2m if the company is “knowledge intensive”. An EIS company has a lifetime cap of £12m on the amount that it can raise through EIS, or £20m if the company is “knowledge intensive.
How do I claim SEIS and EIS income tax relief?
You can normally claim SEIS or EIS tax relief when you file your tax return. You’ll either reduce your tax bill for the year or receive a refund for tax you’ve already paid.
If you need help in setting up an EIS or SEIS scheme please call us on
07813-915-038 or 01628-623-444
Or email [email protected]