Enterprise Investment Scheme Bonds, EIS SEIS, Asset Backed Investments

EIS - Enterprise Investment Scheme

Established in 1994 by the UK Government with the aim to stimulate the economy, EIS offers tax relief for investments into smaller, high risk companies. Investors are provided with a tax efficient way of investing and the EIS approved companies can further finance the growth of their business.

The investor may contribute up to £1 million in any given tax year and receive up to 30% income tax relief. The scheme is aimed towards unlisted companies with less than 250 employees and maximum gross assets of £15 million prior to investment. Once the investor participates in the scheme, they are locked in for a minimum of three years. EIS investment opportunities remain as one of the most attractive tax efficient ways of investing in the United Kingdom and is a well-established part of the UK tax landscape for investors.

Smaller companies tend to grow rapidly and although the investor holds the risk of incurring losses, there is also the balanced advantage of potentially making a much bigger return on the original investment.

EIS BENEFITS

  • 30% TAX RELIEF - Up to £1 million per individual may benefit from 30% income tax relief. For each £100,000 of investment, the actual cost is £70,000. The whole of this allowance can be carried back to the previous tax year to offset against income tax, i.e. a theoretical £2 million could be invested of which £1 million (the maximum EIS qualifying investment in a single tax year) could be carried back to the last tax year.
  • INHERITANCE TAX - Inheritance Tax (IHT) has been dubbed the 'optional tax', and many individuals today are exposed to potential IHT bills, largely because of relatively high property prices. However, high-earners are potentially more exposed. After two years from the investment date, EIS qualifying companies generally fall outside the estate for IHT purposes, potentially allowing considerable assets to be preserved intact for dependants, saving 40% IHT.
  • CAPITAL GAINS TAX DEFERRAL RELIEF - This is also available in addition to the above and is not capped at £1 million. This allows up to three-year-old capital gains tax to be rolled over into EIS qualifying companies and potentially be further reduced by other tax allowances over a period of time, such as timing disposals in order to utilise annual CGT allowances and inter-spousal transfers to maximise tax efficiency.
  • NO CAPITAL GAINS TAX - Provided the shares are held for a minimum of three years, there is no Capital Gains Tax (CGT) due on the proceeds. However, the shares can be held for much longer, to realise the investment potential, thus continuing sheltering gains from CGT and potentially sheltering substantial capital gains.
  • LOSS RELIEF - Loss relief applies in the event a share should become crystallised at a loss. Were a share to be worthless, the loss could be offset against income tax. For a 40% taxpayer, the £70,000 net cost could be offset against that year's tax bill, or the previous tax year's allowing £28,000 to be claimed back, so the actual loss would be £42,000. In other words, 42p in the pound is the maximum exposure i.e. less than half the original outlay is at risk. For a 45% taxpayer, the same relief mitigates downside exposure to 38.5p in the pound. Losses can also be offset against CGT at the prevailing rate, currently 28% for higher-rate tax payers, in either the current tax year or subsequent tax years.
Enterprise Investment Scheme Bonds, EIS SEIS, Asset Backed Investments

SEIS - Seed Enterprise Investment Scheme

Following the success of the EIS, in 2012 the government introduced the SEIS in order to encourage investors to finance start-ups by providing more generous tax breaks for backing projects which may otherwise be viewed as too risky. The SEIS and EIS schemes are very similar but also have some very crucial differences. It is designed for investing into even smaller companies, offering even larger tax breaks in return. Whereas the Enterprise Investment scheme offers 30% tax relief, The SEIS is an incredibly generous derivative of the Enterprise Investment Scheme (EIS). Its aim is to encourage seed investment in early stage companies. Investors, including directors, can receive initial tax relief of 50% on investments up to £100,000 and Capital Gains Tax (CGT) exemption for any gains on the SEIS shares.The maximum amount to be raised for SEIS approved companies is £150,000 before it moves on to EIS.

To receive investment under the SEIS banner, a business must be relatively new, 2 years old or less, have less than 50 employees and under £200,000 in gross assets. Like the Enterprise Investment Scheme (EIS), there is high risk however, with the ample tax breaks on offer, the potential for large returns can be appealing to some.

  • SEIS Income Tax Relief - If eligible, you can claim back up to 50% of the value of your investment in the form of income tax relief. Therefore, if you make an investment of £10,000, for example, you can save £5,000 in income tax.
  • SEIS Capital Gains Tax Reinvestment Relief - If you choose to reinvest gains from other non-SEIS investments into an SEIS eligible company, you will receive 50% Capital Gains Tax relief on the original investments. Therefore, if a prior investment has given you a gain of £10,000, all of which you decide to reinvest in an SEIS eligible company, 50% of that £10,000 gain will be exempt from Capital Gains Tax.
  • SEIS Loss Relief - If the business performs poorly and you lose money on your investment, you may claim loss relief. The loss relief you can claim is at the equivalent rate to the highest rate of income tax you pay. So if you pay income tax at a rate of 45%, you can claim up to 45% of your net loss in income tax relief. For example, if you make a £10,000 investment and the business fails meaning your investment is no longer worth anything you could claim loss relief. Firstly you could claim the 50% income tax relief (£5,000 in this example). Then of the remaining £5,000 you can claim 45% income tax relief on this £5,000 loss, so your total loss is only £2,750.
  • SEIS Inheritance Tax Relief - After holding the shares for 2 years, there will no longer be any Inheritance Tax on their value.
  • Disposal Relief:- Depending on your personal circumstances, if you sell your shares after having held them for at least 3 years, then you may be able to pay no Capital Gains Tax on your investment gains. Therefore, if your investment value triples over 3 years, and your shares initially worth £10,000 are now worth £30,000, you will pay no capital gains tax on your £20,000 gain if you decide to sell your shares. Please note that is is an example only, and due to startup equity being a high risk asset class, your investment value can also decrease over time.
  • Deferral Relief - You will not have to pay Capital Gains Tax until a later date if you dispose of an asset (any asset) and use the gain you made on that asset to invest in shares in a company that qualifies for SEIS. You will usually have to pay the Capital Gains Tax when you dispose of the SEIS shares.
  • Applying tax relief to a previous year (carry-back) - You can use a carry-back facility allowing you to treat shares as if they were acquired in the preceding tax year. If, for example, you invest £10,000 in an SEIS eligible company in the 2018-19 tax year, your income tax relief would be £5,000 (50% of £10,000). You can apply to have that £5,000 carried back to the previous tax year (2017-2018) and relieved against your tax in that year, as long as you had not acquired more than £100,000 worth of SEIS shares in that year.